My presentation on Match Group

At the Stansberry Research Conference & Alliance Meeting in Las Vegas on October 23, I gave a presentation with my macro outlook on the U.S. economy and how it's faring relative to peer countries, which I covered in two e-mails last week. Then, I concluded with a stock pitch for Match Group (MTCH), which owns many dating apps, the largest of which are Tinder and Hinge.

I've been so busy writing about other topics that I haven't gotten around to sharing my stock pitch until now. But that could be a good thing for any readers interested in buying the stock for an even lower price... It tumbled 18% yesterday after reporting disappointing third-quarter earnings.

Before I analyze Match's earnings report, here is some data from my presentation, which I've updated to reflect the current share price and third-quarter numbers...

Today, more than 60% of American couples now meet online (source):

And Match is the leading online-dating company. This slide from the company's investor presentation shows its many brands and apps:

The stock has been a bust since Match was spun off from IAC (IAC) in 2020:

In light of the stock's performance, you might think the company's financial performance has been terrible, too. But, in fact, revenue and net income have risen nicely since the spinoff:

Match is a free-cash-flow ("FCF") machine, generating nearly $1 billion annually:

And Match is increasingly using its FCF to buy back shares. As you can see in the next chart, it has bought back $743 million of stock in the past year (6% of shares outstanding) and $1.8 billion since the beginning of 2022 (16% of shares outstanding).

The company's stated goal is to use 75% of FCF on share repurchases – and, in fact, it used 100% last quarter.

All this looks pretty good. So why did the stock crater yesterday? Well, let's take a look at the earnings report...

Revenue rose 2% year over year, with revenue per customer rising 5% even as the number of paying customers dropped 3%, as you can see in this chart from the company (which I've adjusted slightly):

This growth has been driven by Hinge, which saw 20% growth in monthly active users ("MAU") and 21% growth in paying customers:

Combined with 12% growth in revenue per paying customer, this translated into fabulous 36% revenue growth for Hinge.

Offsetting this, however, was continued poor performance of Match's largest business, Tinder, which saw a 9% decline in MAU. According to the earnings release, this "was the same rate of decline" as in the second quarter, falling short of management's expectations for continued improvement in year-over-year trends. Tinder's paying customers dropped 4%, offset by a 4% increase in revenue per paying customer, resulting in a 1% decline in revenue.

Overall, Match's total revenue for the quarter was $895.5 million, slightly missing estimates of $900.9 million. But margins were steady, and earnings per share of $0.51 beat estimates of $0.48.

The company's guidance for the fourth quarter was tepid, which explains much of the stock's sell-off. Revenue is expected to be flat (up 2% to 3%, excluding exited businesses), with Tinder down 2% to 3% due to a mid-single-digit year-over-year decline in paying customers.

Meanwhile, the company expects Hinge revenue to grow 25% year over year, a slowdown from recent quarters.

Overall, Match foresees adjusted operating income to grow 4% to 6%, excluding a one-time litigation charge.

Turning to valuation, at yesterday's closing price of $31.11, the company had a market cap of $8.6 billion. Adding $3 billion of net debt gives you an enterprise value ("EV") of $11.6 billion, so the stock is trading at a 3.3 times EV-to-revenue ratio and 8.9 times forward earnings. (Capital IQ estimates that normalized earnings per share, excluding non-cash and one-time charges, will be $3.51 next year.)

That's too cheap for a company with very attractive economic characteristics – high margins and low capex – that dominates its sector and is likely to continue to do so given strong network effects.

Hinge continues to grow like a weed, and there's plenty of room for online dating to grow. Only 37% of U.S. adults have ever used an online-dating site or app (and only 7% currently use one). Even among 18- to 29-year-olds, those figures are only 56% and 13%, respectively.

Tinder is shrinking slowly, but much of this is because Match implemented safety features to reduce scammers. This measure improved the user experience, but reduced users over the past year. Going forward, it should start to grow again.

This could lead to a rerating of the stock – and a quick double.

And if the stock remains depressed, share repurchases will become even more of a meaningful tailwind.

Lastly, there are three smart activist investors pushing for change: Starboard Value, Elliott Investment Management, and Anson Funds Management. You can read the letter Starboard sent to the company on July 15 here. I think they have good ideas to restart growth.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.