In February of this year (right in time for Valentine’s Day), online dating giant Match Group (NASDAQ:MTCH) acquired the remaining 49 percent of dating app Hinge that it didn’t already own. Match had previously purchased a majority stake in the app back in June 2018, adding Hinge to its stable of dating sites/apps that also includes Tinder, OkCupid, Plenty of Fish, and the namesake Match service.
The timing was fortuitous. Since the pandemic began, Hinge’s userbase and revenue have exploded. This development has a few important implications. It shows that Match’s market segmentation strategy is working, which helps the company solidify its competitive position. Hinge’s success also provides another avenue for growth aside from Tinder, padding the company’s top and bottom lines in the process.
March Group’s Market Strategy
Match’s marketing strategy is shaping up into a masterstroke. Part one of the company’s coup consisted of Tinder itself, which introduced the ‘swipe’ feature and double opt-in system that is now de rigueur for all dating services. The innovations transformed the sleepy online dating industry into a gamified experience, finally bringing the elusive youth market into the fold.
Tinder’s somewhat sleazy reputation as a “hookup app” allowed other entrants such as Hinge to build brands around the idea of a more relationship-focused service. Rather than retool Tinder to be all things to all people, Match bought Hinge and embraced the idea of market segmentation.
The differences are apparent in the mechanics and features of the two apps. In many ways, Tinder is a more egalitarian app, refusing to offer filters other than an age and location range. The setup of a Tinder profile is quick and easy. For the most part, there’s an “anything goes” attitude.
Hinge is designed to limit the more casual aspects of Tinder. Most prominently, (unpaid) users can send a maximum of ten “likes” a day, discouraging people from spamming profiles with right swipes. New users are also required to upload six pictures and fill out several biographical prompts, whereas Tinder requires no information aside from first name and age.
With Tinder, the company talks about encouraging young college-aged people to embrace the “single lifestyle.” The brand’s cheeky advertising leans on memes that suggest Tinder is about putting off “adulting” and instead having “adventures.”
Hinge, on the other hand, is marketed toward young professionals in their late-20s and early-30s looking to settle down. The app’s tagline “designed to be deleted” underscores the idea that the ultimate end goal is finding a relationship. The app’s advertisements make this clear.
Match Group’s marketing has been hugely influential on how my generation approaches dating in general. One’s younger years are for fun, while late-20s and early-30s are for settling down and starting families. These notions aren’t exactly new, but Match’s services amplify them in a way that’s unprecedented. The company has literally created an entire culture. I can think of few modern parallels, although Big Tobacco’s popularization of cigarettes and De Beers’ marketing of diamonds both come to mind.
Hinge as a Growth Engine
With the dating market clearly segmented into Tinder, Hinge, and legacy services such as OkCupid and Match.com catering to an older crowd, Hinge is now poised to drive a huge amount of new revenue for Match Group. The company says Hinge will triple its revenue this year, and the app turned profitable for the first time in Q2 of this year as the pandemic drove people online. Hinge has grown its user base by a factor of twenty since Match first invested in the app.
Although Match doesn’t offer any specific numbers, Morgan Stanley analyst Lauren Cassel estimates that the app has 6 million active users and about 400,000 paying subscribers. Those numbers are dwarfed by Tinder’s estimated user base of over 50 million active accounts and more than 6 million paying users, but Hinge’s customer base is older, and thus, willingness to pay is higher. Although Match’s controversial data-driven pricing makes it difficult to pinpoint an average cost, one of the more common tiers is $9.99 a month for a Tinder Plus subscription. Meanwhile, yours truly (the author of this article) has been offered a $13.33/month subscription by Hinge, which is supposedly the “most popular” option.
Assuming that the 400,000 paying user figure is accurate, simple arithmetic shows that Hinge could be generating in the neighborhood of $64 million annually in sales from subscriptions alone. That may not move the needle much on Match Group’s $4.9 billion in revenue, but let’s not forget that the company’s sales grew 50 percent in the last three years on the strength of Tinder Gold. Within five years, Tinder went from zero revenue to a billion-dollar business as management focused on monetization. Even if Hinge achieves just half of that growth, the impact on the company’s top and bottom lines would be significant.
Valuation and Volatility
Right now, the stock is trading at about 58 times its 2019 earnings of $2.08 per diluted share (or 39 times 2018 earnings of $3.05). It’s a rich valuation considering that the stock traded in the 25-30 times earnings range several years ago. Now, Match trades more in line with its tech company peers.
Match Group’s stock has often fluctuated wildly based on headlines. There have been more than half a dozen occasions since 2018 where the company gained or lost more than 25 percent within a matter of weeks. In April/May of 2018, Match stock plunged 25 percent on the announcement that Facebook (NASDAQ:FB) would enter online dating (remember that?). I wrote at the time that Facebook Dating wouldn’t be a factor and suggested that the service would flop, which of course it did.
Earlier this year, Kerrisdale Capital released a much-hyped short thesis on the stock, contributing to a 50 percent decline from January to March. The centerpiece of the bear case revolved around the Justice Department’s probe of the company, which it closed last month without charges. Kerrisdale also postulated that dating app “fatigue” would cause users to abandon online dating. As any observer would have noted (and, once again, yours truly did), there is zero evidence for dating app fatigue. Quite the opposite, in fact.
Now that Match Group is a fully independent company after IAC (IAC) sold the remainder of its shares during the summer, it could very well become a buyout target itself. One potential acquirer could be none other than Facebook, as some analysts suggest. With $58 billion in cash and short-term investments on the books, Facebook could easily swallow the $31 billion Match Group.
At this point, I’m remaining neutral on the stock, but would be happy to add on any major dips. As history has shown, Mr. Market occasionally presents great opportunities to buy Match stock at a discount.
Disclosure: I am/we are long MTCH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.