Potential Generation-Specific Purchase Chance for Match Group, or Worthy Investment Warning?
Finding a stellar internet stock at a discount isn't common, but Match Group (MTCH 6.91%) might just be one of those unicorns. Or is it a trap hiding in disguise?
At first glance, Match seemingly ticks all the boxes for a value stock. However, dig a little deeper, and the deciding factor becomes crystal clear.
Match Group dominates the digital dating sphere
More and more individuals are finding love in the digital world, yet untapped growth potential remains. According to a Morgan Stanley study, as of 2023, only 32% of single Americans use an online dating app. Out of those 32%, only a modest proportion pays for premium features. Though user growth has slowed in recent times, the vast number of individuals yet to join apps and underutilization of some platforms indicate a wealth of opportunities in the sector.
Match Group boasts an extensive portfolio of leading online dating sites, including Match.com, Tinder, Hinge, Meetic, OkCupid, Pairs, Plenty Of Fish, Azar, BLK, Hakuna, and others. The company categorizes its various brands into four primary segments: Tinder, Hinge, MG Asia, and "Evergreen & Emerging," a mix of Match's mature, non-growing brands and up-and-coming subscale dating brands.
Despite possessing many top-notch online dating brands, Match trades at a relatively low price, fetching 15.7 times this year's estimated earnings and an even more modest 12.4 times 2025 estimates.
Additionally, high-profile activist investors Starboard Value and Elliott Management have taken an interest in the stock. With two influential advocates guiding management and the board of directors, investor-friendly measures should begin to materialize.
Therefore, you have a market leader, an attractive valuation, and activist investors committed to enhancing shareholder worth. It seems like the perfect setup!
But Match grapples with a Tinder predicament
While Match may claim to be diversified, and consequently a safer investment than single-product companies, its earnings remain heavily reliant on Tinder.
As evidenced below, Tinder is responsible for nearly half of Match Group's third-quarter revenue (52.6%) and an even more substantial portion of adjusted operating income (77.8%).
Although Hinge, a dating app promoting serious relationships, shows significant promise within Match's portfolio, management anticipates a significant deceleration for the current quarter. Growth is projected to decrease from 36% in Q3 to a mere 25% for the current quarter.
Consequently, the fortunes of Match Group are intrinsically tied to Tinder's performance in the near term. And Tinder has been grappling with user and payer declines, with management still attempting to reverse the trend. If the Tinder app experiences a downturn, it could potentially negatively impact the overall investment thesis for Match Group.
Tinder's challenges and solutions
In the post-pandemic, high-inflation setting, online dating apps faced challenges. Online dating has become widespread, attracting fraudsters in the process. A recent Pew Research study found that 52% of online daters reporting encountering scammers, with 57% of female online daters feeling unsafe and 85% of those who continued to message despite being disinterested. Tinder became saturated with spam and fake users, as its perceived "hookup" reputation became a target for exploitation.
Luckily, Match's management is addressing these issues head-on. However, this clean-up process often results in a decrease in monthly active users (MAUs) and payers. Regardless, it's a necessary step.
Management's new initiatives include introducing mandatory face photos for "faceless" profiles to send likes. Other initiatives, such as "Spotlight Drops" and expanding the "Explore" tab, are intended to help people find dates based on shared interests. Moreover, a recent marketing campaign named "It Starts With a Swipe" aims to demonstrate how even Tinder dates can lead to long-term relationships.
These initiatives aim to rebrand Tinder as something more than a "hookup" site and draw women back to the platform. Some initiatives have shown promising signs, such as an uptick in paying users, even though payers still decline year-over-year.
However, challenges still persist. Tinder's MAU count remains on a decline, and management forecasts a 2-3% revenue decrease for the current quarter. Additionally, management is still trying to find the optimal pricing structure, such as a la-carte features to convert free users into paying subscribers. But when tested last quarter, a-la-carte offers led to some cannibalization of full subscription-payers, forcing Tinder to revisit and refine these ideas.
The recovery could be bumpy
Investors shouldn't expect Match's recovery to be a smooth ride. However, if management can at least stabilize Tinder and transform it from a declining business into a growth one again, the stock could surge.
Though the transformation hasn't occurred yet, investors should remain vigilant for positive signs, as Match appears to be a rare potential bargain in the tech landscape.
After considering the financial aspects and the influence of activist investors, investing in Match Group could be an attractive opportunity due to its leading position in the digital dating sphere and an appealing valuation. However, the company's reliance on Tinder's performance for a significant portion of its revenue and income presents a potential risk.
Despite confronting challenges such as user and payer declines, Match Group is actively addressing these issues with new initiatives, aiming to reposition Tinder as a site for serious relationships and combat fraud. While the recovery may not be smooth, a successful transformation of Tinder could significantly boost the company's overall performance.
