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Match Group (NASDAQ:MTCH) is a buy considering its dominant position in a secularly growing industry and underpenetrated markets, with huge opportunities to monetize. To understand the attractiveness of Match Group, readers need to understand why people choose online dating in the first place. There are four main reasons why.
Greater pool of people to choose from – Online dating can give users access to a much wider group of candidates. People are no longer limited to professional or social circles, but can meet anyone within a certain radius of their location
Improved efficiency – The ability to search and match with candidates after seeing a profile of their information allows for filtering of suboptimal matches. This improves the odds that a connection is made, particularly in conjunction with a larger pool of candidates
Greater convenience – Dating apps allow for matching and conversations to begin from the comfort of a user’s home. No longer do people need to attend events or gatherings to meet new people, but can do so from the confines of their home with a wider swath of potential mates
Greater comfort and control – Dating products reduce the awkwardness of introductions and allow people to meet more comfortably and with control over potential candidates.
These four factors have enabled online dating to become the preeminent way for couples to meet in the modern era. Adoption of these products has been widely accepted in Western countries, with the United States leading the way. In other continents, nearly 2/3 of singles have never tried dating products. Countries like Japan have traditionally seen more of a stigma around online dating, but that is beginning to fade. Additionally, as emerging market countries see increased usage of mobile technology, dating app downloads have followed in tandem.
(Source: Investor Day Presentation)
As for the largest players in the market, there is no shortage of online dating services. In the United States, people report using an average of 3.3 apps, meaning this is not a winner take all market. In the U.S., the seven largest players are tinder, Bumble, Plenty of Fish, Match.com, OkCupid, Grindr and Hinge. While users have a wide array of brands to choose from, 5 out of these 7 are actually owned by Match Group. Match benefits from the illusion of choice and is the clear leader within the industry.
Business Overview of Match
Match is the leading provider of dating products globally, with a portfolio of brands that includes Tinder, Hinge, Match, Meetic, OkCupid, PlentyOfFish, OurTime, Grindr and many more. Each of its offerings targets a specific consumer segment, with Tinder being the clear leader in the field, with its focus on casual dating and hookups. Tinder contributes around $1.2 billion of Match’s total $2.1 billion in revenue.
They report revenue in two segments: direct and indirect revenue. Direct revenue comes in the form of subscription revenue and a la carte features on their brands. Users will generally get access to a limited number of features for free, with additional features unlocked through payments. Indirect revenue on the other hand comes from advertising. It makes up just 2% of overall revenue and involves outside brands paying Match to advertise on their platforms. Match has seen steady growth with revenues growing at a CAGR of 20% since 2015, with Tinder contributing a CAGR of 123% over that same time frame.
(Source: Q4 2019 Earnings Presentation)
So, it is well established that Match is the leader in the online dating space, but will this translate to the business seeing sustained capital growth?
Match will benefit from secular tailwinds in the online dating industry
In the United States, 47% of singles ages 18-24 are using dating products, up from 16% in 2012. Additionally, 39% of all singles are using dating products, compared to 29% in 2012. Over the past 7 years there has been a massive increase in young people utilizing dating apps, removing the stigma that they are just a way for old people to meet.
While the last decade has seen significant growth, the next decade should also see sustained tailwinds for Match. The global market for online dating is expected to grow at a CAGR of 11.6% through 2024. As online dating continues to gain social acceptance, Match is well positioned to benefit. Additionally, the pandemic has accelerated many of these growth trends as people were forced into online dating due to lack of other viable options. Daily active users reached an all-time high in April for Match at the height of the pandemic as users were looking for companionship. Match has also been encouraged by trends with video dating during the pandemic, an area that could drive growth as well in the future.
Markets are currently underpenetrated, particularly the Asian markets, with sizable room to grow
Despite the rapid growth of online dating, the overall market is still massively underpenetrated. A total of 61% of U.S. singles have never tried an online dating product, leaving a long runway of growth ahead for Match domestically. They also benefit from network effects as each additional user strengthens the network and grows the pool of potential candidates. This also reduces the pool for in person introductions, forcing more people onto their platform and creating a virtuous cycle for Match.
The American market is still underpenetrated and the rest of the world and APAC in particular are still in the early stages of a massive growth story. 75% of global singles have never tried a dating app, which are similar figures to U.S. and Europe before 2012. The Japanese market saw 125% growth in the first half of 2019 compared to 2 years prior, with no sign of slowing down. The top dating app in Japan is Pairs, owned by… you guessed it, Match. The APAC markets appear to be on a similar trajectory as the U.S. almost a decade ago and Match is once again in the driver’s seat in these markets.
Additionally, Match is tailoring their offerings to adapt to the different markets. In the APAC markets, recurring subscription models are not the norm. The Tinder team is focusing on providing more pay-as-you-go and in-app currency models, to meet customer needs. Management at Match has continually shown to be innovative and willing to adapt to their customer base.
(Source: Investor Day Presentation)
Subscriptions are under monetized with potential for ARPU expansion
Not only is the global dating market underpenetrated, but Match is currently under monetizing their offerings with room to improve margins. Average revenue per user (ARPU), sits at around $0.58 which is well below the industry average ARPU of $8.51. Much of this discrepancy is due to Match’s focus on a freemium model, whereas many competitors only have paid offerings.
(Source: Q3 2019 Earnings Presentation)
However, this ARPU is still incredibly low considering the opportunities Match products provide. Other subscription-based services like Netflix (NFLX) cost $12.99 for a standard plan, Spotify (SPOT) is $14.99 and HBO costs $14.99 per month. All of these are higher than Tinder Plus’s $9.99 offering, yet none offer the potential to meet a future spouse or partner.
Match’s offerings have remained under monetized as they have focused on taking share in the market. As they begin to reach maturity in markets like the U.S. over the next decade, there is huge opportunity for them to increase their pricing. As more people utilize their platforms, Match’s pricing power will continue to increase, as users are forced to start online dating or risk getting left behind. Overall, there is still huge ARPU gains to be made, even as Tinder has grown ARPU by 71% over the last 3 years. Additionally, these ARPU improvements can come not only from increased pricing, but also from higher conversion of free users to premium through improved features, including their newly released premium tier.
Match is also focused on embedding themselves further along the dating journey and have worked to bring unique events and features to users. These include the highly popular “Swipe Night”, an interactive journey leading to 25% higher number of swipes. Match also began rolling out video capabilities on many of its platforms in June, to try and keep users on their apps. One of the fundamental issues with online dating as a business is the better an app does at fostering connections, the quicker it gets deleted. If people find a significant other, the odds of them deleting their dating apps grow, increasing churn for Match. Match understands this reality and is making strides to create a more comprehensive platform. The introduction of video platforms can increase time spent on the app and improve engagement. Hinge has also partnered with online restaurant reservation company OpenTable to help users select a date spot. Partnerships like these increase the likelihood users keep conversations on the app, instead of taking it to text and cutting Match out of the process.
Advertising revenue is almost non-existent with massive potential to monetize
While direct revenue has been growing at over 20% a year, indirect revenue (advertising) has gone the opposite direction. Over the last 3 years, Match’s advertising sales have fallen from 4% of overall revenue down to 2%. Management has had no interest in pursuing ads in recent years, instead opting for subscription revenue growth. The lack of ads has also been a strategic move to drive organic growth for Match Group’s products and to grow the user base as fast as possible.
Eventually, online dating penetration will mature, and Match will be forced to pursue ARPU gains through subscription increases, but they also have this potential advertising revenue stream in their pocket. Platforms like Tinder are ideal for advertisers, who can use Tinder’s profile information to target specific users and get ads shown directly in between swipes. When management decides to switch focus, they have this lever to pull to enter the second stage of this growth story. Dating platforms are rich with user information and it is easy to target specific demographics. Projections for the company are assuming minimal growth in indirect revenue, but this avenue could be a potential goldmine for Match Group as their markets eventually become saturated.
Management spent years operating Tinder at a loss to grow the user base, before pivoting focus to monetization and have since turned it into a cash cow with high margins. Management has proven their ability to monetize in the past, and this underappreciated revenue stream seems no different.
Great pipeline of products will drive future growth, with particular focus on Hinge
Out of Match Group’s numerous brands, Hinge appears to be emerging as a possible breadwinner from the pack. Hinge is for more relationship-oriented consumers, compared to the more casual nature of Tinder. Hinge has been on a phenomenal trajectory, with downloads up over 100% in 2019 and revenue over 400%. Management believes they can improve monetization per registered user by 3x, using their proven playbook from Tinder. Many of Tinder’s successful features will be implemented on Hinge in the near future.
Additionally, Hinge reached profitability unexpectedly in Q2 2020, well before internal estimates from management. It is fast becoming a sizable revenue stream for Match, and its trajectory looks similar to Tinder back in 2015. Hinge’s unique pitch is that it allows users to “like” specific parts or photos of user’s profiles, creating more personalized and pinpointed conversations. The market is focused mainly on Tinder’s growth prospects and Match tends to trade on Tinder news, ignoring the other brands in the portfolio. The market is missing the rise of Hinge as a viable alternative and #2 player in the space. If Hinge can continue to scale and monetize like they are trending historically, it can be a material driver of EBITDA growth for Match over the next 3-4 years.
(Source: Q4 2019 Earnings Presentation)
From a valuation perspective Match group is not the cheapest stock, but often you have to pay up to own great businesses.
It trades at around 36 EV/EBITDA and around 7x EV/Sales. There are very few comparable publicly traded companies, making a comparison of multiples very difficult. Bumble is set to IPO in 2021, which should give investors a better handle on valuations. The valuations are nothing crazy for an internet stock with a ton of growth. NFLX trades at 59x EV/EBITDA and 11x EV/Sales, TWTR at 69x EV/EBITDA and 10x EV/Sales and FB at 21x EV/EBITDA and 10x EV/Sales. These are obviously not direct comps but can provide some sense of what investors are willing to pay up for secularly growing internet businesses (all figures according to CapIQ).
The biggest risks involve the emergence of new competitors that take market share away from Match Group’s brands. The biggest concern for many investors is with Facebook (FB) and their rollout of Facebook Dating. The argument is that Facebook’s access to a plethora of data and the scale of their business can allow for more optimal matching and a larger userbase than any other current dating apps. However, their strengths are also the pitfalls of the business. Users want a separate platform for their dating life, and consumer distrust of Facebook’s privacy handling is very high. Additionally, Facebook Dating has seen weaker growth than many anticipated and does not appear to be emerging as the dominant force many forecasted. Match has seen no impact on their revenue or KPI’s so far, as a result of Facebook entering the market.
The other main concern is centered around regulatory risk. Match recently was cleared by the DOJ after a yearlong investigation into their business practices on whether they mislead non-paying users. Match is also currently on the FTC’s radar, which is something to monitor on the regulatory front.
Overall, Match Group is a phenomenal business with huge opportunities still lying ahead. They are the dominant player in a secularly growing industry with many underpenetrated markets particularly internationally. They also have huge opportunities to improve ARPU through improved pricing as well as conversion of more users to paid subscribers.
Match also has multiple levers they can still pull including with advertising, which is another massive untapped source of revenue. Additionally, it has a great pipeline of products including Hinge, which is on a similar growth trajectory to Tinder but is being largely ignored in favor of the more established Tinder brand.
Ultimately, Match has a long runway of growth ahead if it can continue to execute on its core strategies and grow its user base. The real potential lies in its opportunities to improve ARPU and advertising revenue, both huge opportunities for Match to improve margins and drive ROA expansion.
Management has proven their ability to compound capital at a high rate over the last 5 years. If they can execute as well as they have, users should swipe right on this dating stock.
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.