This article first appeared on SumZero, the world’s largest research community of buyside investment professionals. In some cases Barron’s edits the research for brevity; professional investors can access the full version of this thesis and tens of thousands of others at SumZero.com.
Disclaimer: The author’s fund had a position in this security at the time of posting and may trade in and out of this position without informing the SumZero community.
Match Group (MTCH), I contend, is in a similar position to where
was five years ago. The company has bought, developed, and improved the premier online dating websites and cellphone applications. Online dating’s industry outlook is exceptional, and Match Group owns and operates the best platforms, which have path-dependent networking effects. Moreover, unlike Facebook, people pay money to use its platforms. (Most of the firm’s revenues come from subscriptions rather than advertising.)
Despite the stock’s appreciation since becoming a publicly traded entity, but especially over the past six months, the company is still undervalued compared to its midcap TMT, specifically internet, high user- and revenue growth peers.
Bear Response: The company’s stock will revert to the mean soon, especially because of how high stock valuations already are. Moreover, there is bound to be disruption in the online dating sector very soon, and even if MTCH’s websites and applications survive, competition will force the marginal price they are able to charge to lower and lower levels.
Response to the Bear Case: Path-dependent processes are not bound by reversion to the mean, and differentiated products and platforms are able to maintain purchasing power on their products and services. Indeed, a successful platform company that gains networking effects develops into an entity in which each successful customer or consumer creates further customers and consumers in a positive, self-reinforcing feedback cycle.
Sell-side: Despite being a mid-cap company with a sub $10 billion valuation, Match Group is a highly covered stock. Twelve analysts have buy ratings, six have hold ratings, and no analysts currently have a sell rating on the stock.
Comps: Match Group’s peer set includes other dating website companies (Sparks Networks, NYSE: LOV) and, more expansively, other platformed internet technology companies with subscription revenue models which display networking effects.
Target Market Cap Range (By 2027): Downside Case: $29,490; Base Case: $107,039; Upside Case: $254,380
Match Group is a publicly traded company which owns and operates subscription-based online dating websites and cellphone applications. Match Group was initially owned by Barry Diller’s IAC and was spun out in an initial public offering in 2015. IAC continues to own approximately 82.4% of outstanding shares, including all shares of Class B stock. Class B shares are the company’s voting shares, meaning IAC de facto continues to control Match Group. MTCH’s most well-known platforms are Match.com and Tinder. Growth in online dating (including both desktop and laptop computers and cellphone application interfacing) has been explosive in recent years and has very promising long-term additional upside as online dating continues to become an entirely acceptable way for single people to meet and the digital revolution which began in the United States in Silicon Valley continues its rapid, seemingly inexorable globalization to both the developed and developing world. Match Group currently owns and operates 45 different brands in 190 countries and available in 42 languages.
The greatest concern about the investment is the present and especially future economics and dynamics of the online dating industry. The sector is highly fragmented and has minimal barriers to entry. To begin a dating website, an entrepreneur needs very little beyond a computer, a website domain, and a unique idea as to how potential matches will interact with one another, or a unique value proposition regarding which particular demographic of people can meet on the website along with the technical prowess and requisite coding skills to bring the product to market. For example, Bumble, a dating application which is approaching Tinder in terms of social ubiquity (it has been mentioned on Saturday Night Live, for example), was able to differentiate itself from Tinder simply by creating a platform that only allows women to send the first message upon two people matching on the platform. Likewise, numerous dating websites have been established which seek to allow people to meet a significant other who is a certain religion and ethnicity or partakes of some distinct activity or hobby.
Therefore, the Bear Case for this investment, which was articulated in all of the sell-side initiation coverage reports that I could find, is that the online dating industry is destined to remain fragmented or become even more fragmented than it already is as websites and applications become even more specialized. The process of increased fragmentation will force down the revenue per user that the companies will be able to charge due to the hyper-competitive nature of the industry and returns on investment will be uninspiring. Along with these factors, IAC, despite having nominally spun-out Match Group in an IPO, continues to own over eighty percent of the outstanding shares. If and when IAC’s shares are sold, these large “distributions” could cause significant supply and demand distortions, putting substantial downward pressure on the company’s stock.
I am taking a different perspective and will contend in this presentation my version of the bull case. The key distinction between the bull case and the bear case is the concept of ergodicity and its inverse, non-ergodicity. In an ergodic process, each event or movement in the process is independent of all the others. The simplest example to consider is that of a coin flip. Each flipping of the coin has no bearing on what the coin will do the next time it is flipped. Each flip is independent of all other flips. In stark contrast, events in the business world presents us with stories of highly non-ergodic processes: Uber’s vast rise as the dominant ride-hailing cellphone application, Amazon’s e-commerce supremacy, and Facebook’s supreme networking effects.
It is my view that the events of online dating are bound to follow a non-ergodic process, and a platform’s success will spawn further success in a self-reinforcing positive feedback cycle. Moreover, as Match.com and Tinder continue their success, they will be able to purchase successful competitors. Rather than being viewed as “highly-competitive” in ten years, we instead will see a Pareto distribution in which the most successful one percent of online dating websites and applications will lead to well over half of marriages that began online, half of revenue generated, and half of total paying members. Furthermore, the percentage of relationships and marriages that began online in the upcoming years are going to steadily increase.
As of 2017, one-third of marriages which occurred began online. I think it is feasible to believe that it can (and will) become half of marriages in approximately ten years. People today often say to themselves, “If only I had invested in Amazon in the late 1990s,” or, “if only I had invested in Facebook just after its initial public offering.” Ten years from now, I think those who did not invest in Match Group will be making similar statements. The remainder of this presentation will be to provide the supporting evidence, logic, and statistics regarding why Match Group will be a superior long-term equity investment.
Until very recently, Match Group had two business segments, dating and non-dating. Non-dating was its ownership of the Princeton Review, which provides tutoring services to people preparing for higher- education placement tests. Match Group divested the Princeton Review in May 2017 to ST Unitas for an undisclosed amount. (On the company’s most recent 10-Q, Match Group recognized a nearly $100 million gain in sale of business, which is almost certainly its sale of Princeton Review.) For all intents and purposes, its dating segment is now its only business segment. As stated in the summary introduction, Match Group owns and operates 45 branded entities. The key brands are as follows.
Launched in 1995, Match is one of the internet’s original dating websites and, arguably with eHarmony, its greatest success story thus far. Today, single people are able to search profiles of other single people, message them directly, and receive algorithmic match recommendations. Match charges a monthly subscription fee which can be purchased at lower per month rates if members purchase multiple months at once.
Tinder was launched in 2012 and became very popular very quickly. At first, it was viewed by men as a means to easily meet women to have brief sexual encounters with, but as time went on, it became apparent that this was not necessarily the intended purpose of women in using the platform. Tinder was the first cellphone application to allow users to “swipe right” if interested in matching with the person or “swipe left” if they were not. The swiping feature has universally entered the Millennial colloquial. While I would not claim it is transformative, for better or for worse, swiping on pictures of potential significant others from a smartphone is now arguably a permanent component and fixture of our dating culture. Tinder was initially free, but, once operated by Match Group, only a certain number of swipes per day are permitted. If someone wishes to have additional swipes, he or she must pay a monthly fee for Tinder Gold. The way that purchases are made on cellphone dating applications are very simple because payment methods such as credit cards are often already linked to a person’s cellphone through the Apple application store (iOS) or Google pay (Android).
Plenty of Fish
Similar interfacing as Match.com. Company has its broadest appeal in the Central United States, Canada, United Kingdom, and other international markets.
Meetic. Leading European dating website based in France. The website allows people to join for free, but requires that they become paid members in order to directly message members and access additional features.
Website and cellphone application. Match Group states that it attracts users due to a “mathematical and Q&A approach” to dating. Ok Cupid users are, on the average, younger and more centered in urban areas than Match.com users.
Pairs. Launched in 2012, Pairs is a leading provider of dating products in Japan with a strong presence in Taiwan and a growing presence in other select Asian countries.
Affinity Brands (Our Time, Black People Meet). Affinity brands are for individuals who are seeking someone who has something in common with them, such as age (Our Time, for example, has the largest community of users of online dating products who are 50 or older), ethnicity, or religion.
Online dating is a relatively recent phenomenon, yet the concept of using Tinder is nearly as ubiquitous as using Google or hailing an Uber rather than a taxi. Tinder alone already has approximately 45 million monthly active users (MAU), 2.6 million of whom are paying to use the platform. In the United States, approximately 125 million of the 250 million people aged 16 or older are single. If these percentages hold roughly equally across the globe, that means that, of the 7.5 billion people alive, there are 5,625 million people who are aged 16 or older. If the number of people globally who are single compared to married were to be equal to the ratio found in the USA in 10 years, then the global addressable market in 2027 would be 3,105 million people. However, insofar as the United States cannot be used as a proxy for the rest of the world, given the vast global disparities in wealth, health, and the vast differences in marriage and courting patterns, the figure should be discounted accordingly. Therefore, I will reduce my estimated global addressable market from 3,105 million people nearly 20% to 2,500 million people.
As of 2016, 15% of adults in the United States had tried online dating. The percentage of people in each age demographic varies drastically as the age group becomes younger. For example, according to Pew research conducted in 2015, only 3% of people aged 65 or older had tried online dating. For people aged 18-24, the percentage was already 27%, up from 10% in 2013. For this presentation, I am going to estimate that, by 2027, 30% of the global singles population will be using online dating.
Given my estimate for a 2,500 million addressable audience by 2027, and given my assumption of 30% global penetration, my base case for the online dating industry is that 750 million single people globally will be using online dating. My base case estimates that Match Group will organically have approximately 75 million monthly active users by 2027, meaning 10% of the industry. That figure is doubled when taking into consideration my allowance for the company to be used as a vehicle to continue making acquisitions. When doubled, this figure becomes 150 million, which is still 20%, well below the Pareto distributions which occur in wealth and income inequality of the top one percent of the population, books sold by leading authors, or Facebook’s dominance versus other social media platforms.
As of 2017, the average person who spends money on Match Group’s dating websites and applications spends approximately $200 each year. Now comes one of the most difficult components of this entire investment, which is: How much money per person will each individual be spending on online dating in the near and more intermediate future versus now, and how will Match Group in particular fare as compared with that average?
Standard textbook economics teaches that, if markets are kept free, companies compete with each other, and this competition forces the marginal price of the product or service they provide to converge toward the marginal cost of producing that product or service. Common sense, history, and everyday experience teaches us otherwise: Namely, certain companies produce products which, quite bluntly, consumers are willing to pay extra money for because they are better than their competitors. Warren Buffett and Charlie Munger of
made a career out of operating under this premise.
It is preferable to spend an extra $.10 for Wrigley’s bubble gum versus the generic competitor, it is better to spend the extra $1 for a Hershey’s candy bar versus the store brand, it is better to spend $10 more for a
tee shirt or $100 more for Nike sneakers than a competitor’s, and it is better to spend the extra $1,000 for the Apple computer than its competitors. Indeed, it is well known that, among teenagers, a pair of Nike sneakers, which could cost $100 or more than others, provide far more value than a pair of sneakers from Payless which were purchased for a fraction of the price. Yet, there are also instances in which microeconomic principles of supply and demand appear to control pricing, such as in oil (”The cure for high prices is high prices, and the cure for low prices is low prices.” – Zach Schreiber) and other commoditized businesses.
The question, then, that needs to be answered if we are to offer an educated estimate of Match Group’s price per user (and thus, its valuation itself), is if online dating websites will be commoditized businesses controlled by microeconomic forces beyond their control, or if online dating websites (Match Group, in particular) will be differentiated entities able to exert pricing power on the subscribers who pay to use their platforms and gain access to the other people who use their platform.
As stated in my summary introduction of the investment opportunity, non-ergodicity (path dependency) has a substantial influence on businesses, but especially online or platform businesses. The first person to build a quality platform often gains a significant advantage over all other competitors. In the case of America’s top technology companies, the advantage seems nearly insurmountable: Google is a de jure monopoly in internet search, Facebook is a monopoly in social networking, Apple is a member of a small oligopoly of cell phone producers, and Amazon functions as a patient (and seemingly benign, even benevolent) E-commerce monopoly that is waiting for the right opportunity to raise prices once everyone is on its platform and has no viable competitors.
It is my view that non-ergodicity will be a significant contributor to Match Group’s success. Match Group, through its Match.com laptop and desktop computer interface, and its Tinder cellphone application, has two platforms which are in the early stages of path dependent, positive feedback cycles which will continue for years to come. Most humans do not live their lives attempting to redefine the wheel.
They are willing to find the world as it is and interact within those given bounds.
Therefore, most people, when choosing which online dating websites or applications to use, will naturally flow to the ones that other people are already using. A certain percentage of people, however, are not content with the status quo. They are the entrepreneurs, revolutionaries, and visionaries amongst us. They see how the world could become more efficient, productive, more efficacious, more equitable, or otherwise less worse and have the endurance and stamina to pursue their vision or objective. Therefore, I want to be clear that I do not doubt that new online dating websites and platforms will be created that will potentially be disruptive, there is a high probability that there will be. However, there are two predominate reasons that this does not concern me. First, Match Group has and will continue to have, due to its first mover advantage, the ability to offer to buy-out disruptive technologies and platforms and add them to its superior ecosystem of products. (As of writing, there are a multitude of rumors that Match Groups is in advanced discussions with the owner of the cellphone application Bumble to purchase it.)
Secondly, and just as importantly, the online dating ecosystem is by no means a zero-sum industry. During a Deal-Book conference in 2015, Reed Hastings commented to his interviewer, Andrew Ross Sorkin, about how the television and media content industry was expanding rapidly while being far less disruptive than had been intuitively assumed. Reed argued, in short, that no one had to go out of business in order for Netflix to continue its meteoric rise. Mr. Hastings then also mentioned the rise of the multi-billion-dollar online gaming industry, and how that, too, had not caused there to be any losers. I anticipate a similar phenomenon in online dating: The people who will be using online dating websites and platforms will typically have enough money to spend on numerous platforms, as long as each platform they use is providing them with sufficient value to continue using that platform.
Therefore, I think it will be far more efficacious for MTCH’s management team – or for a potential investor in MTCH – to focus on consistently improving the experience and interface of its products and maintaining a robust vigilance towards potential synergistic acquisitions that can be made rather than ideologically and dogmatically being concerned with the idea of “disruption.”
Due to these factors, along with the general increases in global GDP to be expected in upcoming years and the concomitant increase in expendable income that this trend allows, my base case for the price per user that online dating will generate will be approximately $250 by 2027, which implies a modest 2% CAGR over the next 10 years. I will also include a downside case in which the average paying member will be spending $220 per person, and an upside case in which the figure increases to nearly $270 per person.
Stock Performance / Market Outlook
Below is Match Group’s stock performance over the past twelve months (see full report). The stock has appreciated significantly, especially since August 2017. The stock has appreciated for two predominate reasons. First, endogenous company operations. Secondly, due to the exogenous factor of an overall bull market, especially in technology stock prices. If we were to purchase this stock, there is undoubtedly a chance that there could be multiple contraction in the near future (especially due to the inflation concerns introduced with especial force on February 2nd, 2018). In total, we are very deep into a bull market (I have read anything from the 6th inning to “extra innings”). Due to the reflexivity principle, many investors appear to no longer be focusing on company fundamentals and are instead engaged in Keynes’ “beauty contest” of attempting to figure out how other investors are thinking and what they plan on doing and only then acting accordingly. Instead, of engaging in Keynes’ beauty contest, we should invest in MTCH for fundamental reasons. Eventually, Mr. Market’s manic depression will subside and companies will be valued based on their long-term, cash-flow generative, fundamentals.
Analysis of Business Operations, Performance and Margins
Match Group has met or exceeded its EBITDA growth targets (which it provides on its quarterly conference calls) since becoming a public company. The company’s revenue growth has consistently been in the double-digits since going public and the consensus estimate on Bloomberg is for this trend to continue into 2018. The sell-side typically forecasts this trend into 2019 as well. The company has maintained an 80% gross margin since its IPO, along with a 30% EBITDA margin, which is forecasted as increasing to 35.5% and 36.8% for 2017 and 2018 respectively on Bloomberg.
Tinder’s paid member count (PMC) was less than 10,000 people when the company first reported it as a statistic in 2015 and has increased to nearly 2.6 million people. The sell-side analysts whose reports I have studied project the rapid growth to continue, with Tinder having nearly 4.5 million paid users and generating $820 million of revenue by 2019.
Total paid member count has steadily increased since the company began providing statistics. Below is a chart of Match Group’s total PMC (see full report).
One metric that has not been promising is the company’s average revenue per paying user (ARPPU). The company breaks its ARPPU reporting into North American and international segments. Since the earliest data I could find (2013), the company’s ARPPU has slightly but consistently decreased each year. The company’s forward guidance is for ARPPU to remain flat.
Match Group’s margins have been very strong and are projected to continue very modestly increasing. A 90% gross margin has been achieved and maintained by two separate companies (
and Zillow) in Match Group’s comp set. Match has the leading operating and EBITDA margins in its immediate comp set. How Match Group’s margins compare with its competitors can be seen in the table below (see full report).
Secular Developments and Catalysts
There are a number of important secular, long-term demographic, sociological, and psychological developments which are, I will contend, very bullish toward the prospects of an investment in Match Group. The first to discuss is the growing acceptance of using the internet and cellphone applications to meet one’s significant other. Online dating was seen, in its nascent stages, as something only desperate people would do by nearly 30% of people polled. More recently, less than fifteen percent of people polled stated that people who use online dating platforms are desperate.
The demographics for an investment in Match Group are very bullish. Millennials have adopted online dating in much higher rates than people aged sixty-five and older, and people who are forty-five to sixty- five. People who are in Generation Z, the generation born immediately after Millennials, are adopting technological use at younger ages than Millennials (since the technology has been around, in essence, for their entire lives).
Another useful factor that favors going long Match Group are the marriage patters occurring in the developed world. People are getting married later, which means more potential time to engage in online dating. I would go as far as questioning if the numerous digital mediums through which people can now meet their significant other has affected, or will affect moving forward, these trends. Namely, the digital revolution has created in my generation a remarkable amount of “FOMO,” or fear of missing out.
On Instagram, Facebook, and Snapchat, Millennials can see how their friends are spending their free time and how much fun they are having (ostensibly, at least). Rather than improving people’s lives, these platforms can instead cause anxiety and depression. I will be curious to see if marriages will continue to occur later as more people utilize online dating websites, because using online dating sources gives people more opportunities to find the “best” soulmate for themselves, in a similar manner to how people utilize Google to find the “best” pizza in Manhattan, the best sneakers for under $100, or the best place to vacation in the Caribbean on a budget.
I think that Match Group is going to have to balance monetizing people in the short term with creating the best possible platform that allows them to meet their significant other sooner rather than later. In the long-term, Match Group will succeed if the singles using its platforms find their husband or wife, even if it causes itself to miss on POC, ARPPU, or top-line growth in a particular quarter.
Taken together, these events mean that people are beginning to use online dating platforms earlier, marry later (and therefore, continue seeking a romantic partner for a longer period of time), people in the developed world (despite the dour imagery portrayed in the media) continue to have more expendable income, and the digital revolution continues to penetrate the developed world. In short, there will be more single people performing more digital browsing for the perfect partner for longer periods of time with more expendable income.
Match Group’s balance sheet is moderately leveraged. As of its most recent 10-Q filing, there was approximately $1.25 billion of long-term debt compared with $378.5 million last twelve months (LTM) EBITDA. Therefore, Match Group’s leverage of total debt to trailing EBITDA is 3.3x. Taking into consideration the company’s cash and equivalents, the net debt to trailing EBITDA leverage ratio is 2.9x. One of the issues Match Group is going to face in its near and intermediate future is making appropriate acquisitions without over-leveraging itself and without diluting its outstanding shares by using its stock as currency for its M&A.
Below (see full report) is the company’s contractual obligations and commercial commitments from its most recent 10-K filing. According to its most recent 10-Q filing, the company’s obligations have not changed materially since then other than an $18.1 million reduction in operating lease commitments and a $75 million increase in the company’s term loan balance.
The company does not have any off-balance sheet arrangements as of its most recent 10-Q filing.
Insider Ownership and Activity
The overall mix of inside activity at Match Group is positive. During August 2017, the firm had five separate inside sales and a sixth on 1 September 2017. Since 1 September 2017, there has only been one inside sale versus seven instances of insider purchases. These seven purchases have occurred as the share price has appreciated significantly, as per the chart below (see full report).
Over the past six months, there has been a net gain in insider ownership of 5.21% which has featured transactions by 14 people.
Match Group’s outstanding shares are owned by a mix of long-only mutual funds (including Vanguard, T Rowe Price, Blackrock), the asset management arm of bulge bracket banks (
JP Morgan Chase,
), and hedge funds. The leading hedge funds in the name are predominately quant funds. These include Two Sigma, Citadel, Millennium, and AQR.
For charts, data and appendices, see the full report at SumZero.