2023-08-02 04:20:20 ET
Summary
- Match Group's Q2 2023 earnings beat consensus revenues and showed impressive performance.
- Hinge, the relationship-focused dating app, drove significant growth, contributing around 16% of Match Group's total revenues with a 30% CAGR.
- Match's Q3 outlook points to around 10% Y/Y revenue growth, and Q4 2023 is expected to report 14% to 16% Y/Y growth.
- Match's potential for expanding its multiple is supported by improving profitability, projected 36%-37% adjusted operating income margins, and strong free cash flow, reducing leverage and improving the balance sheet.
Investment Thesis
Match Group's ( MTCH ) Q2 2023 beat consensus revenues. For a company that in the past several quarters has not only missed revenue estimates but also had very little to point towards to draw investors in, its Q2 earning result was undoubtedly impressive.
Not only are Match's revenue growth rates starting to look better right now, but looking further ahead to the end of the year, we are now expecting better growth rates, and most crucially, higher free cash flows.
All in all, there's a lot here to be excited about, so I'm upwards revising my rating on Match Group stock to a buy.
Why Match Group? Why Now?
Hinge stole the show for Match Group in Q2. Yes, Tinder is responsible for approximately 60% of Match's overall revenues. But Hinge, which promotes a more relationship-focused dating philosophy, grew by 35% y/y. And this growth is on the back of 27% y/y revenue growth rates in Q1.
Put another way, according to my estimates, by the time Match Group exits Q4, Hinge will contribute to around 16% of Match Group's total revenues, and it's growing at around 30% CAGR.
Simply put, Tinder is performing reasonably well, at around 12% to 15% CAGR if we look out to Q4 2023, but with Hinge growing dramatically faster, investors will be drawn towards Match Group as a cheaply valued turnaround story.
Match Group's Outlook Positively Impresses
Match's outlook for Q3 points at the high end to come in around 9%. Although this figure probably incorporates some level of conservatism with the ultimate figure for Q3 revenue growth rates likely to cross 10% y/y.
Accordingly, this forces two considerations upon us.
SA Premium
In the first instance, the most obvious one. With Match likely to grow its revenues by 10% y/y in Q3, that's significantly higher than what analysts had expected prior to this guidance being offered.
Secondly, the comparables with Q4 2022 become even easier, meaning that unless something goes wrong for Match Group, it's likely that Q4 2023 could report around 14% to 16% y/y revenue growth rates.
By extension, this allows Match to deliver quite a different story, one of a successful turnaround in its growth prospects, particularly given that starting with Q4 2022, Match will be on a path to deliver 4 consecutive quarters of accelerating growth rates.
And there are few things that can expand a stock's multiple better than a company that's reporting accelerating growth rates, something we'll address in the next section.
Can Match's Multiple Expand?
About 12 months ago, Match's forward P/Sales multiple was touching 6x. Presently, including the premarket jump, its forward P/Sales multiple is under 4x. I will not make the case that since it was around 6x forward sales historically, therefore it will necessarily return to this level now. But I won't be too quick to argue against that line of thinking either.
After all, Match's underlying profitability in 2023 is expected to come in stronger than in 2022. Indeed, if Match is able to point to accelerating revenue growth rates, together with improved profitability, I suspect that investors will view this in a very positive light.
More specifically, Match's adjusted operating income guidance leads one to believe that perhaps 36% or even 37% in adjusted operating income margins could be on the cards. Altogether this guidance points to Match's adjusted operating income now reaching around $1.3 billion.
Given that Match is able to convert its underlying profitability into free cash flows at a very high conversion rate, it now appears increasingly likely that Match will be able to reach and surpass its previously asserted guidance of $800 million of free cash flow in 2023. In fact, even as much as $900 million of free cash flow in 2023 doesn't seem to be outside of its reach.
Furthermore, with this level of free cash flow, one crucial concern of mine, Match's highly leveraged balance sheet, rapidly becomes a non-issue. After all, on the back of this elevated level of free cash flow, I can easily see Match's net leverage falling from 2.8x on a trailing basis, down to around 2.6x in the next 2 quarters. Meaning that in the course of 12 months, Match's leverage will have gone from 2.9x net debt to adjusted operating income to about 2.6x ratio.
Meaning that there's an improved balance sheet, a more profitable company, and rapidly accelerating revenue growth rates. Altogether, there's a lot to like here.
The Bottom Line
After Match Group's impressive Q2 2023 earnings, I am excitedly upgrading my rating to a "buy."
The standout performer was Hinge, growing at an impressive 35% YoY, on a path to contributing around 16% of Match Group's total revenues and showing a 30% CAGR.
Match's outlook for Q3 suggests revenue growth rates crossing 10% Y/Y, with comparables for Q4 2022 becoming even easier, pointing to potential growth rates of 14% to 16% YoY.
This continuous acceleration in growth rates could expand Match's multiple, particularly as its underlying profitability is expected to improve in 2023. With adjusted operating income guidance suggesting around $1.3 billion and strong cash flow conversion, the concern of Match's highly leveraged balance sheet diminishes.
Overall, the company's improved balance sheet, profitability, and rapidly accelerating revenue growth make Match Group an appealing investment opportunity.
For further details see:
Match Group: Surging Ahead With Strong Q2 Performance