Match Group: We’re Swiping Left For Now (NASDAQ:MTCH)

Summary

Match Group, Inc. (NASDAQ:MTCH) is the largest player in the online dating market, owning a portfolio of 14 of the most popular and well-known brands, including the marquee product, Tinder. Following a strong rebound coming out of COVID-19, paying user growth has slowed dramatically, and turned negative at Tinder. This, along with the significant increase in interest rates, has driven a massive negative re-rating of the company’s stock. Match’s massive selloff and dominant market position caught our attention, and we wanted to take a closer look.

We found that the market appears to be pricing a prolonged period of Tinder payer erosion, creating a potentially positively asymmetric return profile. However, we sympathize with the bear case to a fair degree and would prefer a larger margin of safety. We are initiating the shares at a Hold.

Overview

Match’s portfolio consists of 14 products, including many of the largest and best-known dating apps, such as Tinder, Hinge, Match.com, OkCupid, and Plenty of Fish. Tinder is by far the company’s most significant brand, generating ~60% of 2023 direct revenue and hosting ~66% of its paying customers (“payers”).

In addition to being Match’s anchor product, Tinder has been the company’s primary growth driver in recent years. However, the recent softness in the app’s payer base has caused the market to wonder if the online dating space has become saturated. Recent entrants into the space, namely Hinge (a Match brand) and Bumble Inc. (BMBL) have been taking share from Tinder at an alarming rate. In the context of Match, the company’s ownership of Hinge helps hedge this to a certain extent, though Hinge’s contribution is still too small to offset the weakness at Tinder (n.b., Hinge contributed <14% of Q4 direct revenue, and accounted for <10% of total payers). This has led to a shakeup in management at Tinder at the same time as the group’s new CEO is taking charge.

We do not believe that the online dating market is done growing, though there are certainly serious pressures. Since 2015, the total number of dating app users worldwide has grown at a ~7% CAGR. From 2015 to 2019, users grew at a ~9% CAGR, but this decelerated to ~5% from 2019 to 2023.

This deceleration in growth is reflected in the declining number of app downloads in recent years, following a peak in 2019.

Recent Performance

In this section, we examine critical KPIs and financial metrics on a quarterly basis from 2021 to 2023. Over this period, revenue has grown healthily in the Americas and Europe but has been flat to down in APAC and Other. The topline growth obscures the troubling decline in payers across the Americas and Europe (n.b., -7% and -2% CAGR, respectively). Revenue growth in these regions was more than offset by aggressive growth in Revenue per Payer (“RPP”). It is also worth noting that APAC and Other saw growth in payers and a declining RPP.

While the above is helpful in understanding how recent growth has trended in different regions, it is much more helpful to look at the product-level trends. Hinge is clearly the standout performer of the portfolio, with a ~32% revenue CAGR driven by ~27% p.a. payer growth and a healthy ~9% RPP CAGR. While Tinder was able to grow revenue, payers have declined ~8% from 2022. The growth at Tinder was entirely a function of the RPP growth (n.b., ~9% p.a. from 2021 to 2023 and ~20% from 2022). All other products came under similar payer pressures, though they were unable to achieve the same monetization success, leading to revenue declines throughout the period.

Some of the payer declines at Tinder can be attributed to price elasticity. From Q3 2022, the peak of Tinder payers, RPP increased ~19% vs ~13% for Hinge. While this relative increase in monetization could well have put off some more price-sensitive users, Hinge is a much more expensive product on a nominal basis (n.b., ~$28.4 RPP vs ~$16.5 for Tinder). This premium pricing for Hinge is possible due to its superior UX and brand image. Match has made great efforts to reposition Tinder as a more serious dating app, rather than the hookup app it is most known as. With much shame, we anecdotally view Tinder’s UI/UX as inferior to Hinge and competitor Bumble’s. This has likely been the primary driver of the share gains seen by Hinge and Bumble. Match is well aware of this, and the new leadership at Tinder is laser-focused on rolling out product innovations to turn the brand around. In the meantime, Match is somewhat hedged through its ownership of Hinge. Unfortunately, Hinge is too small at this stage to offset Tinder’s weakness meaningfully.

All the preceding resulted in decent EBITDA growth, with some early signs of margin improvement in Q3 and Q4 2023. Our definition of FCF deducts stock-based comp (“SBC”). While non-cash, this is a real cost for the business and offsets much of the company’s share buybacks, which is helpful when we look at FCF/share. FCF was significantly depressed in Q2 2022 due to the +$400MM lawsuit settlement with Tinder’s founders. Excluding this item, FCF/share was ~15% lower than in 2022.

Valuation

Match is trading for ~7x and ~11x LQA EBITDA and FCF, respectively, or ~8x and ~14x LTM EBITDA and FCF. We value Match via DCF, and our base/bull/bear cases are outlined below.

All cases use a 10% discount rate, 3% terminal growth rate, and are unlevered. The base/what-you-need-to-believe (“WYNTB”) case contemplates an inflection to payer growth at Tinder in 2025, with continued strength at Hinge, with a stronger margin profile given positive developments on App Store economics, and results in a share price of ~$37.5, or an ~18% return.

The bull case contemplates growth in the other payer base and a slower decline in other RPP and results in a share price of ~$42, or a ~31% return.

The bear case contemplates continued payer erosion at Tinder, with no RPP growth, and a more severe decline in other products, and results in a share price of ~$30, or a -6% return.

With the market pricing in a scenario similar to our bear case, we feel positive about the spread of potential outcomes. However, we believe the bear case is closer to the most likely outcome. With our view that returns from here are likely to be on the lower end of the cases presented, and the moderately attractive return profile of the WYNTB case, we feel that a Hold rating is most appropriate. We would likely turn bullish around $30/share or if we see evidence of successful product innovation at Tinder that meaningfully improves the outlook for payer growth.

Risks & Catalysts

We do not see any significant risks or catalysts for Match beyond the near-term performance of Tinder. Given the brand’s outsized contribution to group profitability and recent challenges, this will be the key driver for the stock for the foreseeable future.

With the market pricing in a bleak future for Tinder, any surprises to the upside will certainly be a powerful upside catalyst. Conversely, should the monetization hiccups continue or worsen, we would expect further weakness.

One argument working for the bear case is the rising rates of user dissatisfaction with dating apps and the increasing propensity of Gen Z to initiate relationships in real life (if you can believe that!). On user satisfaction, the NYT reports:

People are reporting similar complaints across the apps – even when they aren’t taking the companies to court. Pew Research shows that over the last several years, the percentage of dating app users across demographics who feel dissatisfied with the apps has risen. Just under half of all users report feeling somewhat to very negative about online dating, with the highest rates coming from women and those who don’t pay for premium features. Notably, there is a gender divide: Women feel overwhelmed by messages, while men are underwhelmed by the lack thereof. (New York Times)

Regarding Gen Z’s propensity to date online vs. IRL, CNN reports:

But Gen Z is also forming romantic relationships offline more frequently than other generational cohorts. About 40% of young US adults in relationships say they were close friends or friends with their partner before they became romantically involved, according to the Survey Center on American Life. (CNN)

Conclusion

Given these concerns, we are exercising caution on Match. We certainly view dating apps as a phenomenon that is not going away and view human nature as a durable demand driver. However, we do believe that the two trends mentioned above will likely hamper a return to the high growth of old. We are looking for a more attractive margin of safety before getting constructive.