Cupid Playing catchup with Capital Markets
Not to worry though, love is still in the air – according to city analysts at least.
I am of course talking about online dating behemoth Match Group Inc. Proprietors of Tinder, Match.com, Meetic, OurTime, Plenty of Fish, Pairs, and Hinge. With such an impressive portfolio on hand, Match Group Inc now commands a 50% market share over the online dating community.
And here sits me, a former user (Hinge, not heroin) and now happily loved up bloke to present you the merits of said organisation despite them having recently unveiled one of their toughest quarters to date.
“Providing the Tinder Swindler hasn’t scared off all the single ladies, then there is clearly still a huge addressable market for Match Group to grow into.”
It hasn’t been the easiest of times for online dating or anything which involves human interaction for that matter because just when you think you’re out of the woods, a mysterious sounding Greek letter fights back with a new viral variant, potentially more transmissible than the last.
Given the lasting Omicron headwinds, Match Group endured their toughest quarter yet when reporting for the 3 months ending December ‘21 with an uncharacteristic loss of $0.60 per share – only their 2nd loss making quarter since IPO in 2017.
To add further pain, they’re trying to tread water in an otherwise sinking market with the NASDAQ 100 down over 15% year-to-date.
On first inspection, the loss of $0.60 per share sounds rather concerning considering analyst’s expectations were anticipating a $0.54 profit per share. So let’s delve into the troublesome set of earnings and see if it’s a one-off soft quarter or if there are more concerning red flags on display.
The Problems
FX Headwinds –
The Fed’s sudden flip-flop from dovish to hawkish monetary policy has seen USD dollar strengthen against many emerging currencies. In turn, Match Group have seen foreign revenues translate into less dollars back on home soil. They estimate this equated to a $12m FX headwind. Not ideal, but certainly not worrisome.
Omicron –
No longer am I having to buy a token ‘substantial’ meal to accompany my pint with the landlord whispering in my ear *pssst, leave a bit of pasta on your plate so I can keep serving you*. Finally, life is almost resembling something akin 2019 when #okboomer was trending and one chap’s viral distain of dating apps was the biggest bear case for Tinder.
However, things over in Japan and Korea are still rather regimented causing their Seoul-based $1.73bn social-network acquisition, Hyperconnect, to be more a burden on the bottom line rather than the love story they initially envisaged. At a time when the company’s headcount is continually rising to accommodate growth seen across portfolio brands such as Hinge and Tinder, Hyperconnect is dampening otherwise buoyant trading.
Lawsuit –
After Match Group acquired Tinder (the largest asset in the MTCH portfolio) back in 2017, a costly argument ensued surrounding the valuation placed upon Tinder. Sean Rad and other original founders argued that Match Group provided false information about Tinder’s forward potential causing the banks responsible for valuing Tinder to award it a low-ball $3bn valuation, a far cry from Rad’s $13bn figure.
After several years, this eventually culminated in case which went on trial in November last year at the New York Supreme Court.
Thankfully their dispute has now been settled, with Match Group having agreed upon a final figure of $441m to be paid out to the founders of Tinder. Although this figure has been accounted for and will reflect in their Q1 ’21 earnings release, the spiraling legal costs to get to this settlement have been very much felt in that recent earnings loss.
Many of the abovementioned problems can be very much categorised as isolated one-off incidents. The ongoing situation with Covid-19 related variants appears to be a devolving rather than evolving one. Match Group themselves are of the opinion restrictive living trends in their affected Asian markets will tail off in H2 of this year following suit with other developed global markets such as the US and UK.
With the share price now down 38% from their October ’21 highs of $175, it begs the questions how much more downside can be priced while so many of their key performance metrics keep growing at an impressive rate?
The Positives
Finally, the good parts and there’s a plenty of them I’m pleased to report.
I’ll kick things off with those ‘city analysts’ I earlier mentioned;
“We believe MTCH is well positioned as the global leader in online dating, which remains early in the shift online with an estimated ~25% of global singles utilizing online dating products. We estimate MTCH has a ~50%+ share of global online dating users, with its largest brands including Tinder, Match.com, Meetic, OurTime, PlentyofFish, Pairs, and Hinge. Tinder is the #1 downloaded and top- grossing dating app worldwide, and we believe is on a strong trajectory with significant room for further payer penetration.”
- Cory Carpenter, Internet Equity Research at JP Morgan
What really took me by surprise in the above paragraph from Mr. Carpenter is that only 25% of singles are using dating apps. Providing the Tinder Swindler hasn’t scared off all the single ladies, then there is clearly still a huge addressable market for Match Group to grow into.
Despite the organisation enduring some unfortunate one items in their Q4 ’21 earnings which I’ve already highlighted, I don’t like to ever judge a company on one soft quarter. Dig a little deeper and you can see the business is absolutely thriving on a revenue basis at the very least.
More importantly, a return to profitability is in the offing with forward guidance from Match Group suggesting they’ll return $2.60 earnings per share for 2022, and a further $3.31 for 2023.
Look into the other key metrics of late and the story just gets better. The number of singles who wish to pay for special in-app features, like unlimited swipes for instance, is now at 16.2m and from those paying customers, revenues per person is up to $16.60.
Crucially, that $16.60 revenue per payer has been increasing gradually every quarter for the last 8 quarters.
The business is evidently growing at a very healthy rate in all the right areas you’d like to see, but shorter-term items are still keeping the share price in the doldrums, and maybe that’s where the opportunity lies.
Valuation
You could literally stick your pin into any NASDAQ listed stock right now and discover a depressed valuation. Some more than others, some less so.
Even as recently as December 2020, you’d find Match Group trading at 17x its Price-to-Sales (P/S). In hindsight, you’d argue that figure is a touch frothy and as your politically incorrect uncle will tell you; times were different then. It’s not December 2020 and the NASDAQ isn’t making new all-time highs every week with a QE rocket up its backsi… Anyway, I digress.
Times are indeed different and Match Group now finds itself valued on a lowly X10.2 Price-to-Sales.
A touch unfair considering how well the underlying business is performing, and it might be fairer to apply a higher P/S valuation providing they can return to profitability and revenues increase in-line with their forward guidance.
Applying their 5-Year P/S average of 12.43 vs 2022 expected revenue, I come out with a share price of $152. But I must stress, I’m not giving Match Group an explicit price target as such, but simply employing a loose Price-to-Sales calculation against their historical average.
Looking at JPMorgan’s more comprehensive valuation approach, they arrive at $165 a share;
Our Dec-22 price target of $165 is based on 35x our 2023E EBITDA of $1.5B, which does not assume any potential positive impact from app store fee reductions. We note this is a premium to key comp BMBL that trades at 18x, which we believe is justified given MTCH’s industry leading market share and best-in-class margin profile.
Conclusion
This is an incredibly trying period for investors and at a time when sentiment seems to be worsening every week and Putin having now breached Ukrainian borders, it takes a brave individual to carry on buying the dip. Some of us are luckily able to endure stock market corrections better than others;
Buying into growth stocks right now is more out of vogue than a discounted fondue set, but that’s not to say it’ll stay that way forever and generally speaking, buy low and sell high is kind of the crux of the stock market investing.
And if you’re close to loosing faith, always remember even the mighty Amazon stock fell more than 94% during the dot com crash despite the company’s key metrics improving in all areas.
Not for a moment am I suggesting Match Group can emulate the extent of Amazon’s success, but similarly while their share price has been dropping most of their key metrics keep improving. Even underneath their overall quarterly loss of $0.60 per share, profits from core operations were a very healthy $232m (a new record for the company).
It’s important to remember that the stock is not the company and the company is not the stock. And while the stock price may conceivably drift further astray in the short term, it will be the company’s underlying performance which ultimately dictates the stock’s price direction in the long term.
Match Group Inc is indeed performing well in the areas that you’d want it to, but the risks are still present. Ideally the items which dragged them into the red from their most recent quarter are one-offs, but it’s not to say we’re never going to see another Covid-19 related variant ruin real life social interaction further down the line. And there’s the trade off – do you, the reader, see the world fully recovering from a pandemic way of living? If so, it makes the path to profitability a far easier one for Match Group and maybe presents a nice addition a growth portfolio.
If you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call 0208 159 8985
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.