2023-04-18 15:22:53 ET
Summary
- Grindr Inc. saw an increase in YoY revenue by 34% to $195 million, but net income decreased by $4 million to $1 million in FY 2022.
- Grindr has a new management team focused on increasing direct revenue monetization efforts through upgrades and add-ons, and using its LGBTQ database for potential new diverse revenue streams.
- Paying users have increased 31% YoY to 788,000 users, but upgrading 12 million users away from its core freemium features remains challenging.
- We are cautious of the SPAC deal's overvaluation of the company, increasing debt intake, and the difficulty of monetizing its location-based dating business model compared to peers.
Since its disastrous debut on the stock market, Grindr Inc. ( GRND ) has had a better start to 2023, with the stock price increasing by 25.90% year to date. The market cap is $1.09 billion, and the stock has little short interest.
Furthermore, GRND reported upward trending top line results in its FY2022 annual report , a growing number of paying users, and increased monetization efforts with a positive growth outlook for FY2023. This may be a good moment to consider buying into the stock. However, it is too early to tell what impact the new management team will have on the business and whether the company's monetization efforts can pay off. Therefore, I maintain a wait-and-see Hold rating for the stock.
Increasing monetization efforts
Grindr Inc. 's business model has focused on location-based dating, unlike dating app peers such as Bumble Inc. ( BMBL ) and Match Group, Inc. ( MTCH ), which use a swiping business model. Its peers have been more successful in incorporating upgrades and add-ons into their freemium business models. GRND only contributes $195 million to the $4.94 billion revenue global industry in 2022, although it is ranked the sixth largest app in terms of users.
Grindr Inc. has 12 million active users, but less than 7% of these users spend money on the app. Many of these users have used the freemium version since the app was founded well over a decade ago in 2009. The new management team have indicated that monetization was previously mismanaged and has made it clear that they want to increase direct revenue efforts and improve the overly spammy indirect revenue efforts. There are now two subscription tiers, XTRA at $19.99 per month and the second tier, Unlimited, at $39.99. The average revenue per paying user increased to $17.28 in FY22 from $16.08 in FY21.
GRND is also experimenting with different pricing points. The significant benefit to these paid offerings is that adverts are removed, users can view 600 to an unlimited number of profiles, and they have the possibility of going incognito. However, the free user offering remains very compelling at 100 free profiles, which is considered sufficient for regular users. It may take up to two years for GRND to research and develop features worth paying for.
The good
GRND has a good growth trajectory, increasing full-year revenue by 34% year-over-year to $195 million and hitting an adjusted EBITDA margin of 44%. Furthermore, direct revenue has increased YoY by 41% for FY2022.
Annual revenue growth (SeekingAlpha.com)
It has a scalable system that is capable of handling severe processing activity. In January 2023, GRND processed over 10.3 billion messages. GRND has seen its gross profit increase over the last four years, which increased by 33% YoY to reach $144 million in FY22.
Annual gross profit (SeekingAlpha.com)
It has a potential advantage compared to its dating app peers due to its focus exclusively on the LGBTQ community, and the brand has grown through word of mouth rather than high marketing spending. The new management team's focus on monetization is benefiting from low-hanging fruit opportunities, such as the profile boost feature, which only came about in December 2022. GRND could replicate and apply the successful revenue-generating product features of its peers.
GRND expects FY2023 revenue growth of 25% and 38% for FY2023 full-year adjusted EBITDA margin. It wants to use its focused database to develop diverse revenue streams through demographic-specific partnerships, services and products. The company is testing pricing and plan optimization with additional features such as Boost, Albums and Filters to increase monetization.
The bad
We have not seen enough of Grindr Inc. performing in the public space, and the management team has not yet proven itself, being only newly formed in 2022 and 2023 . The company decided to go public through an unpopular SPAC deal which majorly overvalued the business. The management team have been overly optimistic in the information fed to investors, with encouraging growth messages. However, we have seen operating income and net income decrease while the company has increased its debt to $365 million. GRND increased its SG&A Expenses by 143% YoY to $74 million due to increased labor costs and public company and external services expenses.
Annual operating income (SeekingAlpha.com) Annual net income (SeekingAlpha.com) Annual net debt (SeekingAlpha.com)
Furthermore, although GRND has been growing annually, some of its newer peers, such as Bumble, owned by BMBL and Hinge, owned by MTCH, which are popular amongst the LGBTQ crowd, have been growing at a greater user rate, as seen below.
Valuation and final thoughts
Year to date, Grindr Inc.'s stock has had a better price return than its larger peers at 25.90%. However, if we look at the valuation metrics, such as the price-to-sales ratio and price-to-book ratio, we can see that GRND is significantly overvalued.
Grindr Inc.'s revenue and paying user base are growing in the right direction. Its strength lies in its focus on the LGBTQ demographic, social networking-like usage activity, and strong brand recognition. However, Grindr Inc. has yet to convert its extensive user database into substantial profits, which may take some time to deliver.
Furthermore, Grindr Inc. is taking on variable interest debts and increasing its expenses as it sets itself up for growth. We are also seeing newer alternative dating apps significantly increasing their market share and have improved offerings for the LGBTQ community. Therefore, I maintain a wait-and-see hold rating for Grindr Inc. stock in anticipation of more concrete bottom-line growth results.
For further details see:
Grindr: Too Early To Tell