The Match Group (MTCH) has been a controversial stock this year. After the lockdowns kicked in and sparked a fear that the company’s apps (a broad portfolio which spans Tinder, Okcupid, Hinge, and several other popular brands) would become obsolete, shares of Match cut in half at their nadir in mid-March. Then, almost as quickly as it fell, the company reported engagement at all-time highs which sent shares rallying even higher versus its prior highs.
Shares are now up ~15% year-to-date, defying a ~5% decline for the S&P 500 as a whole.
The key question for investors now is: does Match still have upside left?
In my view, there are two main negative considerations for investors to weigh, especially after the stock’s steep climb since April.
- User activity is up – that’s great. But what about subscribers? So far, what we’ve seen is negative trends on subscriptions and revenue, despite increased engagement from existing users.
- Heavy debt load, especially post-IAC separation. We like the fact that the Match Group is separating itself from the IAC conglomerate. Especially in a time when focused brand “stories” have become winning stock picks, allowing Match to focus on its better growth story will play well for investors. However, we note that especially with the $3/share cash consideration that Match is paying to IAC shareholders, the company’s debt levels are rising to teetering levels.
Investors have seemingly placed all the positive news on better-than-expected engagement ahead of the actual financial results. We note that consensus is currently calling for single-digit revenue growth in both Q2 as well as the full year FY20 (despite Match growing at a 21% y/y clip in February). With so much uncertainty in the macro environment, we don’t know yet what a return to normal looks like for Match.
Then there’s also the question of valuation. At present share prices near $96, the Match Group has a market cap of $24.39 billion. After netting off the $791.3 million of cash and $2.10 billion of debt on Match’s most recent balance sheet, its enterprise value is $25.70 billion. Against Wall Street’s revenue expectations of $2.25 billion in revenue this year (+10% y/y), this represents a hefty 11.4x EV/FY20 revenues. For comparison, this is three turns richer than Facebook’s ~8x forward revenue multiple, despite the fact that Wall Street consensus pegs both social media companies’ current-year growth rates at about ~10%.
Steer clear here.
User engagement is up, but subscribers and revenue have yet to follow
Here we want to make a key distinction between the trends that we’ve seen in Match’s underlying ecosystem so far. It’s true that user engagement has been up – but it’s subscribers that actually generate the bulk of the revenue for Match.
The company’s most recent Q1 shareholder letter noted that “daters showed strong willingness to video-date”, and the company’s apps have rolled out new features to accommodate the lockdown policies. Commenting on user activity in that letter, Match wrote:
Since the outbreak, we’ve seen a noticeable increase in activity among users, especially those under the age of 30, across all of our brands and all geographies. People are matching more frequently, sending more messages and engaging in longer conversations. The average number of daily messages sent across all of our products in the month of April was 27% higher than during the last week of February, and for users under the age of 30 it was 35% higher.”
The company included this handy chart that shows daily messages and the count of Tinder swipes growing dramatically into February:
Figure 1. Match Group user activity trends
But here’s the disturbing news that came alongside it: even though activity is up, it seems that the lift was on the free user side. The subscriber front has yet to see a recovery. Though North America user growth seem to have flattened out, the cuts of data we see below show international subscriber adds barely recovering in April after a 9% reduction in March (and this is despite the fact that on the whole, international markets have relaxed their lockdown policies a lot sooner than in the U.S.). Ditto for Tinder, where after a 6% decline in March, April barely saw any recovery.
Figure 2. Match Group subscriber trends
Source: Match Group Q1 shareholder letter
So despite the fact that the Match Group is creating more matches during the pandemic (for lack of a better phrase), this isn’t driving an uptick in paid users. In fact, the company wrote:
We are seeing some headwinds to new users signing up and the motivation to pay. In aggregate, the initial impacts were most pronounced among older users and in markets where COVID-19 infection rates were highest. As the lockdowns have dragged on, we have seen some impact on younger male users, while there has been some recovery in the over 30 demographic. New sign ups and subscriptions are faring better among women than men as is the case for engagement.
On Tinder, this led to first-time subscriber declines sequentially from February to March before stabilizing in April, though first-time subscribers were up meaningfully year-over- year in each month. In addition to the age and gender-driven differences, we see rolling effects on Tinder because of its broad geographic footprint and the pandemic’s varying impacts across different geographies. We are also seeing some headwinds to ARPU due to a shift to lower-priced subscriptions and fewer a? la carte purchases.”
Match also specifically called out that the biggest increase in usage and activity on Tinder was in the under-30 female category. Historically, men have had more propensity to upgrade to a paid account than women, which means this boost in activity doesn’t translate directly to revenue growth.
We can see in the chart below that revenue growth slowed down to just 9% y/y in April (thirteen points weaker than what it was in February), while ARPU growth has also started to trend negative.
Figure 3. Match Group revenue linearity
My fear is that the Match Group’s current share price rally essentially prices in all of the boost in engagement, without factoring in the lack of recovery in revenues.
Debt levels are soaring
The other point we need to make is that, especially for a company whose growth is stalling and whose EBITDA margins are trending downward (as you can see in the chart below, the March weakness in subscribers led to a 190bps reduction in EBITDA margins in the first quarter of 2020), Match’s debt levels are looking extremely risky.
Figure 4. Match Group key Q1 metrics and adjusted EBITDA margins
The chart below shows the Match Group’s debt maturities post-separation from IAC. Existing Match debt tallies up to ~$2.1 billion, and the company plans to at least partially pay for its $3/share separation consideration to IAC ($850 million in total) by drawing down on a currently unused $750 million revolving line of credit.
Figure 5. Match group debt levels and maturity schedules
After the separation closes, Match wrote that:
We currently expect to have net leverage slightly below 5x when the separation closes, including assumption of the IAC Exchangeables. That is a little higher than we were initially expecting, in part because we now expect our adjusted EBITDA for the first half of the year to be a little lower.”
A 5x leverage ratio is far above the ~3x threshold that banks typically consider to be a leveraged company. The company notes that it still is confident on being able to de-leverage below 3x within 18 months, but the reality is that investors will be looking at a heavily-indebted company for a long time. Very few internet/technology companies are in this heavily indebted of a position (indeed, most are in a net cash position); a ~5x leverage ratio is typically reserved for industrial companies were very stable earnings. The only good news is that the majority of the debt matures far into the future, which gives Match time to generate cash flows.
There’s a lot of uncertainty surrounding Match, especially around recent subscriber trends and expected debt levels. The stock’s ~15% rise this year seems to not price in any of this risk, so investors should be careful jumping onto the bandwagon late in the rally cycle.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.