Why I’m Buying Match Group (MTCH)

TL;DR — They own 5 of the 7 most popular dating apps in the US, including Tinder and Hinge, and they’re just getting started.

When I think about investing in technology companies, I generally look for businesses with moats that get bigger with scale, in industries that are rapidly growing. I believe Match Group (MTCH), the world’s most popular network of dating apps, fits that mold and will continue to leverage its large network of users and dating data to become a powerhouse in the technology field for the years to come.

What is Match Group?

Match Group owns 5 of the 7 most popular dating apps in the United States, including Tinder, PlentyOfFish, Match.com, OkCupid, and the rapidly growing Hinge. The company also owns many popular foreign dating apps, including Pairs (one of the most popular apps in Japan) and Meetic (one of the most popular apps in France).

Many dating app users under 30 use up to 2–3 different dating apps to serve different interests (e.g. long-term relationships vs. short-term meetups) and ultimately, maximize their chance of getting a match. Little do these users know that their dating app options are an illusion of choice — a majority of the most popular dating apps in the world are all owned by one company, the Match Group.

Let’s start by diving into their key products.

  • Tinder (#1 in the US, 56% of 2019 Revenue) —Match Group’s flagship mobile dating app founded in 2012
  • PlentyOfFish (#3 in the US) — Online dating service that is also popular in Canada, UK, Ireland, Australia, New Zealand, Spain, and Brazil. This app was acquired by Match in October of 2015.
  • Match.com (#4 in the US)— Online dating service serving over 50 countries in 12 languages, founded in 1993. According to SurveyMonkey, the median age of users on this platform is 45, compared to only 26 for Tinder and 32 for OkCupid.
  • OkCupid (#5 in the US) — Online dating service acquired in February 2011. OkCupid has been around for a long time, having been listed in Time Magazine’s Top 10 dating websites in 2007.
  • Hinge (#7 in the US) — Relationship-focused app acquired in February 2019. Hinge is in hyper-growth mode, growing 110%+ in 2019 in terms of global downloads. The app has a lot of runway for revenue expansion, as the app is only generating half the revenue per user that Tinder generates.
  • OurTime —The most popular dating app for singles in their 50s and older. The company reports that this app is growing revenue in the double digits.
  • SingleParentMeet — The most popular dating app for single parents
Source: Statista.com, in cooperation with Verto Analytics. As of September 2019.
  • Pairs —Japanese online dating app founded in 2012 and acquired by Match in 2015. The app is growing at 44% year-over-year in Japan.
  • Meetic — French online dating service founded in 2001 and acquired by Match in 2013. A recent product revamp here has catapulted new subscriber growth to a 6-year high.

Growth Opportunity #1 — We Are Still in the Early Innings of Online Dating

How Heterosexual Couples have met in the United States (source: Reddit)

In 2000, ~5% of couples met online. In 2010, that number was ~20%. In 2020, that number will approach 40%.

There’s reason to believe that online dating in the US will continue to increase, with other markets like China at ~55% penetration. As the stigma around online dating evaporates, and Gen-Z begins to become of dating age, online dating penetration in the US will continue to increase.

Source: Equity Research reports

It’s worth noting that only 28% of surveyed Americans have used a dating app in the last month, compared to the 64% of Americans who have ordered food and 70% who have streamed a movie. Online dating has a big opportunity ahead of itself, even in the already highly-penetrated United States.

Source: United States Census

In addition to the growing acceptance of online dating apps, people are getting married later and later, and as a consequence, will spend more time dating before getting married.

Millennials and Gen-Z simply date differently. They use online means to find partners rather than through more traditional means. This can only mean good things for online dating apps which will benefit from a larger pool of available consumers who will be using their apps for longer periods of time. On top of that, dating app consumers in their 30s and 40s will have more disposable income, and so as the average age of marriage increases, so will the number of big spenders on dating apps.

Growth Opportunity #2 — International Expansion

In 2019, International revenue made up 48% of Match’s total revenue. That number is expected to climb in the years to come.

In 2019, Match’s International revenue grew by 27% year-over-year, compared to only 13% for North America revenue. The short of it is, to believe in this stock, you have to believe in its international opportunity.

There are 600 million single adults globally, of which, roughly half are in the Asia Pacific region (APAC), nearly 4x as many as North America.

Whereas online dating usage is around 40% in North America and Europe, online dating is just getting started in many areas in Asia. India (11% penetration) and Japan (17% penetration) represent untapped new markets that are in the first inning of online dating as they transition from old cultural norms regarding relationships and marriage.

Match’s expansion strategy internationally is not one-size-fits-all. In its two most promising international markets, India and Japan, it takes two very different approaches to find success. In India, it offers existing products, with slight tweaks to address cultural customs. In Japan, it has acquired a homegrown app that already has an insider edge.

For what it’s worth, India and Japan look a lot like the US dating scene from 10 years ago (20% penetration) before Tinder was introduced. We’ll see if Match’s dating apps will have a similar effect abroad.

In the first quarter of 2020, Tinder was the highest-grossing app on iOS and Androids in India. OkCupid downloads in India increased by 600% year-over-year.

This growth in India comes as no surprise. Matchmaking has always been a part of the culture in India, where Sunday papers are filled with matrimonial ads. Some of the most popular dating platforms in India are matrimony.com and shaadi.com, which are focused on finding marital partners. On top of that, smartphone usage is prolific across the country, even in remote areas of the country.

Tinder has taken full advantage of this by adjusting their app to fit the matchmaking culture of India and different cell-phone coverage areas:

  • They launched “My Move” last September, in order to combat sexual harassment. Similar to the Bumble, the feature allows women to vet their match and start the conversation first. This has helped combat a culture of aggressive behavior towards women that is common across India
  • They have developed a “Tinder-Lite” version to be used in remote areas of the culture with worse cell-phone coverage
  • They have consulted with local organizations (e.g. The Humsafar Trust, advocates for LGBTQ rights) to make the app more accessible to underserved communities (e.g. extending the list of gender options). Tinder has provided an important avenue for marginalized communities to meet without going in public

With more Indians moving away from arranged marriages, and the increasing urbanization of the country, India will continue to present a massive opportunity for Match Group’s suite of apps.

In Japan, management quickly realized that it would be prudent to add a more conservative dating app to the mix in a country that focuses on serious relationships.

In 2015, the company acquired Pairs, one of the most popular dating apps in Japan. With Pairs, Match gained an inside edge — knowledge into what works and doesn’t in the Japanese market. For instance, in Japan, blood type (ketsuekigata) is considered to be an important personality definer and ultimately, a critical part of any dating profile. Additionally, Pairs is on top of Japan’s strict dating app regulations, which have arisen in response to the increase in prostitution on online dating apps in Japan in the 1990s.

Both Pairs and Tinder have succeeded in the Japanese market, proving to be the #1 and #2 players respectively in Japan (by downloads). This number will only increase going forwards, as the Japanese have very heavy work schedules and very high cell phone usage, both of which have proven to be strong leading indicators of online dating apps.

Source: App Annie. Screenshot from the company’s Q4'19 Investor Presentation.

Ultimately, Match has the opportunity to go where high populations are, and where the populations are digitally enabled. Singapore and Korea could be up next.

Source: Q4 2019 Investor Presentation

Match plans to shift a significant portion of its resources into Asia (just like how it supercharged Hinge in 2018). In addition to Pairs (Japan), it also plans on backing Harmonica, one of the most popular dating apps in Egypt that it acquired in August of 2019.

Match also plans on adding resources to dating apps with unique takes on dating. This includes Ablo (an award-winning video chat app), Ship (a dating app that lets friends pick out dates), Chispa (for Latino singles), and BLK (for Black singles).

Match has a strong international opportunity ahead of it, and I’m confident that given their resources, they’ll be able to continue to take advantage of it.

Growth Opportunity #3 — Tinder Can Make More Money Per User

Tinder is the highest-grossing app on the App Store, surpassing the likes of Netflix and Hulu. This comes as no surprise, as Tinder has gamified online dating, and dating app consumers are willing to spend a lot on something that is a pretty important component of their lives.

Additionally, Tinder has one of the lowest weekly-churn rates of any dating app, which allows its subscription services to have longer lifetimes (and ultimately lifetime value) than other mobile apps on the App store.

Source: SurveyMonkey Intelligence

The Tinder base app is free to use with limited features. Users can swipe right, or “like” up to 50–100 people per 12-hour period, and are limited to 1 “super-like” on another user’s profile.

  • Tinder Plus ($10/month) — Tinder Plus enables users to get unlimited right swipes or unlimited “likes” of other users. These users also get 5 super-likes, get a rewind feature to undo a previous swipe, and a passport feature that allows the user to change their geographical location without actually going there. This passport feature enables users to meet people in a new location before going there.
  • Tinder Gold ($19/month)—Tinder Gold includes all the features available to Tinder Plus users, plus it allows users to (1) see which users have already right-swiped or liked them and (2) go through a queue of profiles that they can instantly match with. The company has seen meaningful uplift in revenue per user since launching the Gold feature in Q3 of 2017 (Tinder ARPU has increased by 30%+).

As the network effects on Tinder get larger, curation becomes more and more important. People don’t want to swipe through millions of profiles. They want the Tinder algorithm to get them the best matches possible, and if that doesn’t work, they want to pay to be put at the front of the line.

To address these needs, Tinder has started introducing a la carte features that have proven to be better monetization tools for Tinder than their current subscription services.

Here are the key a la carte features that Tinder offers:

  • Super Likes (~$1 each) — These allow users to stand out amongst all other users who have liked someone
  • Boost ($6.50-$9 each) — These allow users to “skip the line” and become one of the top profiles in their area for a 30 minute period. Boosts can generate up to 10x more profile likes.
  • Super Boost ($40 each)— These are like boosts, but can result in 100x more profile likes
  • Read Receipts ($1–3 each) — These help a user determine whether a message sent to another user has been read
  • Top Picks ($0.30 per person) — These allow users to see a list of highly probable matches

The street is underestimating the opportunity behind this a la carte revenue model, which management has said is the model that they are shifting towards. The biggest money-making app on the app store is about to get a lot richer.

Source: Q4 2019 Investor Presentation

The Match Group’s other hot apps (e.g. Hinge) can leverage the monetization methods of Tinder and also expand their ARPU (average revenue per user) opportunity going forwards.

Growth Opportunity #4 — The Match Group is an M&A Powerhouse

Match collects more dating data than any company in the world. It’s no wonder that they’ve been able to stay one step ahead of the curve when it comes to acquiring new dating apps.

Acquisitions have been a key part of their DNA. Hinge, PlentyOfFish, and Pairs, 3 of their most successful dating apps, were all acquired through M&A.

Plus, with Match’s resources, many of these apps have been launched to the forefront from relative obscurity. After nearly going bankrupt in its early days, Hinge was supercharged by Match in 2018 and launched to the forefront of the dating scene as America’s favorite relationship app.

Match acquired six companies over the past decade, and all of them expanded Match Group’s horizontal reach across online dating. Additionally, Match has made these companies more successful than they could’ve ever been by themselves.

Wall Street isn’t projecting any more M&A upside in this company, but I am convinced that it’s there given the company’s strong track record.

Growth Driver #5 — The Magic of Their Parent Company, IAC

IAC is a US holding company that owns many popular internet and media brands, including Match Group, ANGI HomeServices (a combination of Angie’s List and HomeAdvisor), Vimeo, Investopedia, and more. As a world-famous incubator, the company has also successfully spun-off many successful companies, including Expedia, Ticketmaster (merged with LiveNation), LendingTree, and the Home Shopping Network (HSN).

Since 1995, IAC has returned a 14% compound annual return, which has outperformed both Warren Buffett and the S&P 500. In November 2015, the company spun-off Match Group in an initial public offering (IPO). IAC currently owns an 80% stake in Match Group and plans on spinning out the remaining 80% of its shares in Q2 of this year. This will add a lot more float (shares) to the stock, and make the stock a lot less volatile.

IAC has created a world-class culture of innovation that has led to the spin-off of many successful internet and media brands, and Match Group is no different.

Risk #1 — Facebook Dating

In September of 2019, Facebook launched Facebook Dating, a free online dating platform. Investors were (and still are) excited about the opportunity. Facebook could bring dating options to its user base of over 160 million people, which was ~6x as much as the amount of dating app users (27 million). Facebook’s own research team found that 40% of online daters felt that there wasn’t a dating app that fit their needs. Third-party research that was released shortly after would support that claim. The dating market seemed ripe for their taking.

Facebook first launched its pilot in Canada with mixed results. The app was buggy (which was surprising given the resources Facebook had), and users were being matched with their friends and family. Eventually, Facebook would fix these bugs, but even bigger problems lie ahead…

In recent earnings reports, Match’s management team has reported no impact on their key metrics from Facebook Dating. This isn’t surprising, as Facebook faces a structural ceiling that many online dating apps don’t have.

Recent surveys have shown that dating app users want to keep their dating lives and social media lives separate. Dating app users are very concerned with Facebook’s privacy features and are concerned their private dating lives will somehow be leaked to the public.

Source: Equity Research surveys (2019)

But what about the integrations Facebook can do with its full suite of apps? Unfortunately, surveys have shown that integrating more social media may create more hesitation with using Facebook Dating.

Source: Equity Research Report (2019)

Facebook Dating may eventually get over these hurdles to reach the mainstream. However, even then, it will become one of a plethora of dating apps used by consumers. It just so happens that most of those apps are owned by the Match Group anyways.

Facebook has a large opportunity ahead of it, and given its free nature, may lead to declines in the revenue per user levels of Match Group’s apps. Still, it’s hard to compete with a dating app company with data on millions of different daters across the world, ready to deploy its resources on the next Tinder.

Risk#2 — Dating Apps are a Saturated Market with “Low Barriers to Entry”

Bumble, the #2 dating app in America, has proven to be staunch competition for Tinder. However, the company has lost some traction following its acquisition by Blackstone (private equity). Bumble is likely spending less than it was previously, and it shows. The company has gradually been ceding market share to other apps after a strong run in the mid-2010s.

Dating is a lucrative market, so it’s no wonder that a new dating app seemingly pops up every day. However, the market is more highly penetrated than ever before, and users are less willing to try a new app with significantly lower user bases than established ones that give them the best chance of finding a quality match. Given data and resource disadvantages, it’s been harder than ever to create a new dating app at scale.

Tinder would not only have to lose traction in the US but also in markets across the globe for Match Group’s stock to be impacted meaningfully. Even if that were to occur, it wouldn’t surprise me if Tinder was upended by another one of Match’s apps, or potentially a Match Group app that hasn’t been acquired…yet.

Risk #3 — Regulatory Risk

Match Group shares dipped in September of 2019 on news that the Federal Trade Commission (FTC) was planning on suing the company for using fake love interest ads (e.g. fake users) to trick thousands of consumers into purchasing paid subscriptions on Match products. However, reading deeper, the lawsuit would only result in a maximum of $60 million, which would be ~2% of Match’s revenue.

Match has utilized the tactics of its parent company, IAC, to cleverly avoid regulation. It doesn’t disclose the number of total subscribers, and instead lists the amount of paid subscribers so it doesn’t run into anti-trust issues. On top of that, what consumer advocate would want to brag about the amount of money spent on dating apps?

The regulatory risk behind Match is a bit overblown, and will unlikely be an issue in the near future.

Risk #4 — Spinoff Risk

As part of its spinoff from IAC, the Match Group will take on $1.7Bn of additional debt, which will leave them with $3.8 Bn of debt following the transaction. The company is projected to have ~$1Bn of Adjusted EBITDA in 2019, so that would put them at 3.8x leverage. However, given how much cash the company generates, it would only take them 2–3 years to bring leverage levels down to their pre-spinoff levels. Investors are worried that higher leverage levels will make it tougher for the company to do acquisitions, but the company’s strong cash generation should ease those concerns.

The benefits outweigh the costs here, as Match does get to get rid of its dual-class voting structure, and materially increase its float (the number of shares outstanding), which should make the stock less volatile going forwards.

The transaction will also be tax-free, with IAC shareholders receiving 2.35 Match Group shares per IAC share. IAC also plans on selling $1.5 Billion of Match shares to a third party, reducing IAC shareholders’ stake in the business.

Valuation

“Actual” represents historical numbers that come from the company’s filings, and “my estimates” are my estimates based on extrapolating historical data.

Match has a strong financial profile, boasting 19% revenue growth, 74% gross margins, and absolutely stellar 38% Adjusted EBITDA margins (which make it a cash flow machine, given their capital expenditures are only 2% of revenue).

Going forwards, we can expect Match to continue gaining paying subscribers, driven by its new apps like Hinge. Match is likely to continue growing revenue per user amongst its North American user base as it continues to introduce a la carte features to its user base (+4% ARPU growth going forward).

Match will continue to gain paying subscribers, especially in the Asia region with Tinder, Pairs, OkCupid, Harmony, and more. Additionally, we can expect the company to begin to roll out its successful North American monetization strategy internationally.

Overall, this model projects that Match will grow its revenue from $2.1Bn to $2.9Bn over the next 2 years, which is roughly 18% per year (compared to 19% growth in 2019). Wall Street research tends to step down growth rates in projection years to avoid being labeled as overly aggressive. However, in this case, Match can continue its strong growth due to a favorable mix shift towards its faster-growing international business.

Additionally, we have assumed that their margins stay relatively the same, though there may be upside to margins as the company becomes more efficient with their sales and marketing (e.g. their word of mouth customer acquisition strategy helps out a lot here).

Technology investors have historically valued companies using forward revenue multiples. Given that 2020 will be an off-year due to the COVID-19 situation, investors will increasingly look to 2021 as the forward year for the stock.

If we take the $2.9Bn of 2021 Match revenue and apply a 10x revenue multiple to it (which is appropriate given the company’s growth rate, profitability, and market size), we get a price per share of roughly $93, which is 17% higher than the current share price.

If we take the $1.1Bn of Match EBITDA and apply a 26x EBITDA multiple to it (which is appropriate given the company’s growth rate, profitability, and market size), we get a price per share of roughly $96, which is 20% higher than the current share price.

Of course, if Match manages to launch another Tinder (through Hinge, Pairs, or even a new app), their growth prospects will increase tremendously, while also netting them a higher valuation multiple. For now, we can justify Match Group’s lofty valuation with reasonable revenue and EBITDA projections.

Technology companies get a higher revenue multiple (Enterprise Value / Revenue) for higher growth (revenue growth) and profitability (free cash flow margin). We have used a scatterplot of technology companies (from Morgan Stanley) to get to the 10x revenue multiple for Match Group, based on its 18% growth and 36% free cash flow margin in 2021.

Note that Morgan Stanley calls Enterprise Value, “Aggregate Value”, hence the “AV/Revenue” label below.

From Morgan Stanley. “AV” stands for Aggregate Value, which is just another word for Enterprise Value. The Y-Axis represents the revenue valuation multiple, and the X-axis represents revenue growth + free cash flow margin.

Conclusion: Investing in The Next Facebook

Fans of Netflix’s Black Mirror TV show can likely recall one of the show’s most popular episodes, “Hang the DJ”, which imagines a world where at the click of a button, one can run 1000 simulations on a potential partner to find an ideal match.

While that blue-sky scenario may be hard to imagine, it is apparent that our society has become increasingly reliant on online algorithms to find their next relationship. Better algorithms lead to better user experience, leading to more word-of-mouth advertising, and ultimately more traction for the dating app. In an age where data is the new oil, Match Group owns the most dating data in the world, which it can leverage to build better algorithms and better apps. When it can’t do that, it has the data necessary to find new dating trends across demographics and geographies, allowing it to acquire when it cannot build.

COVID-19 has caused a delay in online dating growth, and has presented investors with the ability to buy a category leader at a discount. However, this delay will not impair online dating long-term, which appears to be full steam ahead going forwards. While Match Group’s crown Jewel, Tinder, has enormous growth ahead of it, it wouldn’t be hard to imagine another category-leading dating app coming out of Match’s successful incubation house.

I am a current shareholder of Match Group (MTCH) and will continue buying more as it continues to lead the growing category of online dating.

The above views represent my own investing views and not the views of my employer.

Technology Investor