2024-01-10 12:07:25 ET
Summary
- Match Group shareholders have seen a decline in stock price, but the involvement of activist investor Elliott could bring positive changes.
- Match has experienced a loss of paying customers due to price increases, but is generating more revenue from remaining customers.
- Match's balance sheet shows a high level of debt, but the company expects to generate significant free cash flow and plans to return half of it to shareholders.
The Match Investment Thesis
Match Group ( MTCH ) shareholders have definitely had a rough couple of years since the end of 2021, if we take a look at the stock price. But tough times sometimes present great opportunities, so I took a look at the company earlier this year . And at that time, I thought the company was overvalued, but it still had strong free cash flow and good growth opportunities. But I said I would look at the company again if there were some major changes, and in the last few days that has happened with the news that Elliott Investment Management has bought a $1 billion stake in Match .
Elliott is one of the largest activist investor firms in the world and specializes in turning around companies and making a good profit from them. Big winners in recent years have been Marathon Petroleum Corporation (MPC), which has an average purchase price in the $40s and is now up more than 280%, and Peabody Energy Corp, which has an average purchase price of ~$4 and is up more than 400%.
So when a company like this comes on board, shareholders can expect things to change, and often for the better. The first news to come out after the Elliott news was that Tinder was getting a new CEO , Faye Iosotaluno, who had been Tinder's COO since February 2022.
Year-over-year, Match has lost some paying customers due to price increases, particularly on Tinder, and in the last earnings call , they guided that the loss of paying customers is likely to continue. In Q3 alone, the loss of paying customers was 6%, and this could lead us to conclude that Match has no real pricing power, as higher prices definitely lead to a decline in users.
On the other hand, Tinder's RPP jumped from $13.8 in Q1 to $16.28 in Q3. Weekly subscriptions made it easier for customers to try out premium levels for a shorter period of time and a small amount of money, and that paid off. So, despite having fewer paying customers, Match is getting more money out of the ones that remain, which is a positive.
And Hinge, the faster growing asset in the portfolio, has an even higher RPP of $27. Payers grew 33% year over year and RPP grew 8%. So if Hinge continues this trend, Match's cash flows will benefit tremendously.
Match Balance Sheet And Metrics
I do not like Match's balance sheet and especially its debt position. I think deleveraging is going to be important. They have $713 million in cash and ST investments, but unfortunately $3.9 billion in LT debt. Net income TTM is only $506.5 million and therefore net income / debt is about 6x if we include the cash position. And for me personally, 4 times is the hurdle rate at which I would say that I like the debt situation.
In addition, debt is most often a problem when a company is having a bad year, so comparing debt to a bad year to see the situation makes even more sense. So if Match had a year with only $300 million in net income, such as 2021 or 2017, the situation would look even more challenging.
However at first glance, Match looks like an FCF machine. The company expects to generate $800 million in FCF in 2023, and they plan to return half of that FCF to shareholders each year. The 8% FCF yield is also often mentioned when talking about Match. But we need to adjust those numbers for SBC to get a better picture.
So we have $800 million of FCF and $217 million of SBC over the last 12 months and therefore the SBC adjusted FCF is only $583 million. So SBC is 20% of FCF and SBC is still growing every year, which does not make it any easier.
Match Capital Allocation
And Match has used a lot of FCF to buy back shares, but unfortunately the shares outstanding are still higher than they were 3 years ago. So it was more to offset shareholder dilution than to return money to shareholders. Clearly, there has been a downward trend in shares outstanding since 2022, but we still don't know what Elliott's plans are and whether they will continue.
However, if Match were to continually reduce its outstanding shares by several percent each year, existing shareholders would definitely benefit.
In terms of return on investment, Bumble is not a real competitor because Match generates a much higher return and therefore creates more value on its investment. In fact, Bumble creates zero added value with its negative number. And Bumble also has cost of capital, so its negative number seems even less appealing.
Match's ROIC of 14.58%, on the other hand, is a good one, so they really show that they have some competitive advantage and know how to invest the money to get a good return. But unfortunately, Match has a lot of debt, so I get a WACC of about 11%, so they only have a ROIC-WACC spread of about 3%. But that could be improved by deleveraging as I talked about in the balance sheet section.
Match's Reverse DCF
The basis for the reverse DCF to see what the market has priced into the stock is the TTM diluted EPS of $1.76. And right now, the market is pricing in 11% EPS growth over the next 10 years. Historically, the EPS CAGR over the last 10 years is only 3% . So the stock looks way overvalued if growth rates remain unchanged. Of course, one should not predict the future from the past, but it is an indication that something needs to change and that Elliott's involvement may be the right thing to do.
Valuation
The EV / EBIT valuation also supports the reverse DCF results. A multiple of 17x for a company that has only grown EBIT by 2.6% annually over the past 10 years is far too high. Typically, companies with 10%+ EBIT CAGR or tremendous growth opportunities trade at a multiple like this.
Where Could EPS Be In 5 years?
Seeking Alpha EPS Estimates
Seeking Alpha's EPS estimates only have a CAGR of 9% over the next 5 years, which is also below the growth rate that the market has priced into the stock. And I do not see much upside potential in terms of multiple, so Match needs to surprise with stronger-than-expected earnings growth or huge share buybacks and a dividend to reward shareholders.
Conclusion
I like that an active investor bought into Match and I really think they can turn the boat around, but I do not like turnaround plays and Match's balance sheet would concern me. But if they deleverage and reward shareholders significantly with buybacks or dividends, I could see this being a success. However, that is a long way to go in such a difficult market. Because the dating market is always competitive.
Match's guidance for revenue growth in 2024 is about 10%, and I don't see them taking much market share in China or India, which would be great growth opportunities, so I think the days of really high growth are over. But Match is still a good company that has built a brand name with Tinder that could still be valuable. And Elliott will have a plan for the company that we will hopefully see soon. So it will be interesting to see what they change and whether the company becomes more attractive as a result.
For further details see:
Match Group: The Activist Investor Is Likely To Be A Game Changer