2023-05-03 07:23:03 ET
Summary
- Match operates in a highly interesting and competitive market where it is the market leader.
- Future growth opportunities are certainly there and shareholders could be rewarded by future cash flows.
- However, I remain unconvinced of their capital allocation skills and long-term competitive advantage.
Thesis
The latest Q1 results were mixed. On the one hand, they announced a $1 billion share buyback program and that half of future cash flows will be returned to shareholders, but on the other hand, revenues and payers were less than ideal.
This, combined with a highly competitive market and an average return on capital, leads me to conclude that Match (MTCH) is not an investment I would make at this time. However, given their strong free cash flow, they could be interesting if the metrics improve.
Analysis
Q1 Shareholder Letter
Total revenue fell by 1% year-on-year, with most of the decline coming from their older apps and websites, which lost significant revenue. Tinder was flat and Hinge managed to grow by an impressive 27%. Over the same period, Hinge also achieved double-digit growth in payers and RPP. So Hinge is really on a growth trajectory and has a few more quarters in it because it is different from Tinder in terms of its target audience. But most singles use more than 1 dating app, so there will be some overlap.
Q1 Shareholders Letter
In 4 years, Match has increased its RPP for Hinge by almost 5 times, while only increasing its user base by 3 times. So monetization is effective at Hinge.
Q1 Shareholder Letter
The total number of payers fell year on year, but Match said that it was not the number of payers that it was interested in, but the revenue.
Q1 Shareholder Letter
And they were successful in the ARR category, increasing it in their two core markets, the Americas and Europe. Overall, the increase was 2% compared to the previous year.
And the plan for the future is to increase the ARR further by increasing the price of their subscription tiers, which are currently cheaper than the competition, and by introducing new features. Tinder has new weekly subscriptions and Hinge has two new subscription tiers with Hinge+ and HingeX. And Hinge is still in the very early stages of its monetization progress and has a lot of room to grow.
New premium features to enhance the user experience are also planned for launch in 2023. And there will be Tinder's first-ever global marketing campaign aimed at its audience.
Match recognizes that the user base is the most important asset in this industry, as people will use the platform where the most people are registered, especially the most registered women. Men are usually the ones paying for premium features and subscriptions, so it is really important for dating apps to get the most women and give them the best experience.
In 2022, the dating market as a whole had revenues of around ~5 billion, of which Match was responsible for 3.1 billion . So they have something of a competitive advantage due to their large market share.
Looking at the US market alone , they have a market share of around 60%, with Tinder leading the way with 29.17%, Bumble, its biggest competitor, close behind with 26.04% and Hinge in third place with 18.75%. Overall, however, 2019 and 2020 were the peak years for online dating in terms of new users and downloads, with more than 285 million downloads in both years and demand falling to 256 million in 2022.
Q1 Shareholder Letter
This is also evident when we look at the usage statistics for 18-34 year olds on Tinder, where we can see that there are many users who have not used Tinder in a year, which are referred to here as lapsed users. But we also see that the APAC and ROW markets are underpenetrated and that there are growing opportunities in terms of lapsed users that can be bought back and people who have never used Tinder in the EU and the US.
So there are plenty of opportunities for user growth. But I think some of the lapsed users are probably gone for good because they are in a marriage or a long-term relationship. And that is a dilemma for dating apps, they ultimately need paying users to be active on their platform and any user who finds their true love and never comes back is not going to make them any money.
Morgan Stanley (MS) believes that a 10% CAGR in revenues could be possible for the dating market by the end of the decade and that monetizing existing users is the key to success and that there is an underpenetrated market of 65+ singles with enough money to spend.
Q1 Shareholder Letter
Total long-term debt is 3.9 billion and cash currently stands at 578 million. This gives a net leverage of 3.0x, which is close to their target. But with FCF of around 101m this quarter and 800m FCF expected in FY2023, the balance sheet looks fine.
Q1 Shareholder Letter
Looking at debt maturities and the ability to generate FCF over the next few years should also lead to the conclusion that debt is not a major threat at the moment.
It is difficult to assess the management quality of the new CEO, Bernard Kim, who was appointed almost a year ago, as the time period is, in my opinion, too short. The effects of his management should be visible in 1 to 2 years.
However, we can see that employees have a positive view of the company's business prospects and that the overall rating is quite decent, but could be better.
We can see that the gross profit margins are on a slightly declining trend, but they are still quite good with a gross margin of 70%.
Net profit margins are very volatile and currently stand at a healthy 11%. The 20%+ of the past were very strong.
If I use EV / EBIT, which is my favorite metric to see if something is cheap, we can see that Match is trading around its average at around 26x. I normally prefer a multiple in the 13 range, so Match is definitely expensive, and there are a number of companies at the moment that have a similar multiple to Match but have much better growth rates, balance sheets and a stronger competitive advantage. So I would not say that Match is an attractive investment at that price and in the current environment.
In addition, the 5-year average annual return on capital is only ~8%, so capital allocation skills are also not of the highest quality at the time of writing.
Conclusion
Due to the expensive valuation and average capital allocation skills, combined with only a small competitive advantage due to its market share, I would not consider Match as an investment category for me at this stage.
Match is still a good company with strong FCF and future growth opportunities, but I have a high bar for new investments and therefore would not build a position. But for existing shareholders, there are still many ways to be rewarded by this company and it could be a much better company in a few years' time.
If the ROC improves over the next few periods and the competitive advantages get a bit stronger, I would definitely look at this company again as I think the dating market is very interesting due to the dynamics that people will be looking for love or other things all their lives. But the market is also fast-moving and a new trendy app could emerge and take a big share of the market, as happened in the past with Tinder, Hinge or Bumble.
For further details see:
Match Group: They Need To Find The Right Match