2023-09-05 05:22:13 ET
Summary
- Revenue growth is fine, but Net Income and Free Cash flow growth is less to be desired.
- Balance sheet exhibits a high Net Debt/EBITDA ratio of 3.5.
- Share dilution and stock-based compensation is a problem. Management is trying to fix this, but it's going to be tough with deteriorating earnings.
- A reasonable valuation and bullish analyst expectations are the only things keeping this a "Hold" rating.
- ROIC is low compared to WACC.
Preview
In this article, I will summarize the 10-K of Match Group ( MTCH ), and then evaluate five categories:
- Growth
- Balance Sheet
- Share Repurchases/Stock-Based-Compensation
- A Fairly-Priced Stock
- Management's Decisions through the Return on Invested Capital ("ROIC") Metric.
I will then assign my rating for the stock based on the performance of these categories and personal interpretation of the information.
10-K
Match Group is a leading provider of digital technologies designed to help people make meaningful connections. The company's portfolio of brands includes Tinder, Hinge, Match, Meetic, OkCupid, Pairs, PlentyOfFish, Azar, and Hakuna. These brands appeal to a wide range of users, with different interests, goals, and demographics.
- Tinder is the most popular dating app in the world, with over 10 million paying users. It is known for its patented Swipe® technology, which allows users to quickly and easily browse profiles and make connections.
- Hinge is a relationship-focused dating app that is designed to help users find meaningful connections. It is known for its focus on profiles that are more in-depth and engaging than those on other dating apps.
- Match is the original online dating service and is known for its high-quality profiles and its commitment to helping users find serious relationships.
- Meetic is a leading European dating app that is popular among users over the age of 35. It is known for its focus on creating a safe and supportive environment for its users.
- OkCupid is a dating app that is known for its unique Q&A system, which allows users to get to know each other on a deeper level.
- Pairs is a popular dating app in Japan that is designed to address the social barriers that are often associated with online dating in that country.
- PlentyOfFish is a free dating app that is popular in the United States, Canada, and the United Kingdom. It is known for its large user base and its variety of features.
- Azar is a video chat app that allows users to connect with people from all over the world. It is popular in the APAC region and is known for its real-time language translation feature.
Growth
For Growth, I want to see a long-term increase in Revenue, Net Income, and Free Cash Flow. MTCH was going through a separation with IAC in 2018, along with the acquisition of Hinge, and a legal battle through Tinder. It's safe to say it's best to look at metrics from 2018 and beyond in this category to judge MTCH fairly. And although we see steady growth in revenue, we see decline, or at best, no growth in net income. Same could be same about free cash flow. Although analysts expect growth in the upcoming years, I've yet to see any historical proof to back this claim. Furthermore, as a tech and communications company, I expect to see better growth performance. Because of these reasons, I will assign a "Fail" in the Growth category.
Balance Sheet
Balance sheet evaluation will be quick and dirty. Although Net Debt/EBIDTA ratio is declining since 2020, the ratio still remains above my typical threshold of (3). I would go easy on this category here if I had solid expectations of earnings growth to cover this debt, but that's not the case here. I assign a "Fail" in the balance sheet category.
Stock Based Compensation and Share Repurchases
MTCH has been diluting shareholders since 2018. I'm not a fan of this. The stock based compensation has risen as well, but they have covered themselves by allocating much larger capital to share repurchases in the recent years. This isn't as bad. I know the plan of MTCH moving forward is to continue share repurchases, which is good, but it concerns me when they have a massive debt load and flat/shrinking earnings. I don't really see this one panning out well, so I will assign a "Fail" in the SBC and Share Repurchases category.
Risk and Discount Factor
For my Discounted Cash Flow Analysis ("DCF"), I am using Free Cash Flows to The Firm ("FCFF"), also known as Unlevered Free Cash Flow. If Unlevered Free Cash Flows are being used, the firm’s Weighted Average Cost of Capital ("WACC") should be used as the discount rate. This is because one must take into account the entire capital structure of the company to include the share of all investors. A portion of the WACC will be found by using the Capital Asset Pricing Model ("CAPM"). The assumptions are shown here:
This riskiness of MTCH is measured by a Beta of 1.59. Beta does not necessarily measure volatility, but it measures sensitivity to the rest of the market. Beta of greater than 1 means the stock is more sensitive to the market, and eludes a higher risk, which means investors require a higher return. Beta of less than 1 means the stock is less sensitive to the market, and eludes a lower risk, which means investors require a lower return.
The Risk-Free-Rate used was the current 10-year Treasury Bond Rate of 4.17%. This would be a guaranteed return an investor could gain risk free, so it only makes sense an investor should gain a higher return for more risk.
The Market Risk Premium is simply the Expected Return of a broad index minus the Risk-Free-Rate. This would be the premium an investor would need to invest in an MTCH versus a simple broad index or ETF. This value was found on Damodaran Online.
Using the Capital Asset Pricing Model ("CAPM") , we arrive at an Expected Return of the Security of 11.19%. After factoring in debt obligations, we arrive at a WACC of 9.79%. This will be used as the base case discount factor moving forward.
Discounted Cash Flow
The DCF models a Base Case Scenario, a Bull Case, and a Bear Case. Assumptions are shown in the tan boxes.
From top down, assumptions for each category are explained:
- WACC - Base Case was previously calculated. Bull and Bear are deviations of the Base Case. This should account for any noise in the WACC calculations.
- Terminal Growth Rate ("TGR") - This is the rate we believe the security will grow indefinitely. Generally, a solid Base Case assumption is 2.5% to represent long term market inflation. I have deviations from this for the Bull and Bear Case respectively.
- Revenue Growth - I input the growth rates analysist are expecting for years 2023 and 2024. For the remaining years, I input reasonable growth rates based on historical rates since 2018.
- Earnings Before Taxes ("EBIT") - Each case follows a different range of average historical margins since 2018.
- Taxes - Average of historical rates.
- Depreciation and Amortization - Average of historical rates.
- Capital Expenditures - Average of historical rates.
- Change in Net working Capital - Average of historical rates.
Discussion
By modifying my assumption switches, I arrive at the following share price distribution:
Base Case - Fair Value of $57 for (18%) upside.
Bull Case - Fair Value of $82 for (43%) upside.
Bear Case - Fair Value of $39 for (-19%) upside.
Overall, I would say MTCH is fairly through a corporate DCF analysis. There is evidence that investing in MTCH may be better than investing in a broad index or ETF from a risk-reward standpoint given the current price, fundamentals, and environment. For this reason, I will give a "Pass" in this category.
Return on Capital
A good way to evaluate Management's decisions is by looking at Return on Invested Capital ("ROIC"). MTCH boasts an average ROIC of 7%, with the high years around 10%. The reason I look at this metric last is because one crucial step is comparing this number to the WACC. If WACC is the internal cost of capital, then the ROIC better be higher, to ensure the company is generating value and not destroying it. Since we have already calculated WACC to be around 9.8%, it's clear that an average ROIC of 7% indicates valuation destruction, or at best, no value creation. Because of this, a "Fail" will be given in this Return on Capital category.
Review
MTCH seems pretty underwhelming. Growth is in decline, or stagnant in the crucial areas. They have high debt while focusing capital allocation fixing their share dilution and stock-based compensation problem. Their ROIC is pretty low, especially compared to their WACC. The only thing they have going for them is they are probably trading at a reasonable price and analysts have high expectations. I once wrote about MTCH in the past, but the more I learn about this company, the less appealing it is. If it weren't for the reasonable price, I'd probably sell this stock, but in any case, a "Hold" might be fair.
For further details see:
Match Group: Swiping Left On Important Metrics