Ever since the launch of Tinder Gold, Match Group (MTCH) stock has been on fire. The stock is up more than 50% since Tinder Gold's launch against a mere 6% gain for the S&P 500. The most recent leg higher is being powered by strong third quarter numbers which underscore Tinder's secular growth potential. We believe, however, that the current valuation on MTCH stock fully reflects optimistic growth expectations for Tinder as well as stabilized performance expectations at OkCupid and Match.
We believe a reasonable one-year forward price target on MTCH stock is $32, implying limited upside after the big Q3 pop.
MTCH data by YCharts
Shortly after Tinder Gold launched, we put out a bullish note on MTCH. The thesis was pretty simple. Tinder is a natural component of the currently in-favor at-home economy. Consumers don't go to movies as much anymore. They watch Netflix (NFLX). Consumers don't eat out as much anymore. They order food through GrubHub (GRUB). Consumers don't shop in-store as much anymore. They go to Amazon.com (AMZN).
By the same logic, consumers don't go out and meet romantic interests anymore. They swipe right and left on their phones.
NFLX data by YCharts
Thus, the more the at-home economy grows, the more popular Tinder will become. The more popular Tinder becomes, the more people will start paying for things like Tinder Gold. It's a natural transition wherein Tinder is a long-term winner.
The third quarter numbers support this thesis. Revenue growth jumped to 19% in the quarter. That is the best revenue growth rate seen so far this year. The full-year revenue growth guide was also upped to 17.5%, which is better than last year's 15% pro-forma revenue growth rate. Clearly, growth is accelerating.
But Tinder Gold is a one-time catalyst that is pushing this growth acceleration. Growth over the next several years will likely moderate, but secular tailwinds in online and specifically mobile dating should keep growth rates healthy. Overall, we are modeling for 11% revenue growth per year over the next 5 years.
This robust revenue growth should allow for natural opex leverage over the next several years, which should turn that 11% revenue growth rate into a mid-teens earnings growth rate. We are modeling for 16% earnings growth per year over the next 5 years.
The problem with MTCH stock is that its trading at 37.5x FY17 earnings estimates for that 16% growth. That is a very steep price to pay for mid-teens growth potential.
Moreover, its bearish to see that although long-term earnings growth estimates are coming down, the stock's valuation is booming higher. That means a lot is priced into this stock, and it implies that there is far more risk than reward at current levels.
MTCH EPS LT Growth Estimates data by YCharts
We like stocks whose valuations move in-line with long-term growth estimates. If growth estimates are trending up, the valuation should trend up, too. If growth estimates are trending down, the valuation should trend down. This is the exact type of behavior that has led to the FANG stocks being secular winners over the past several years.
AMZN EPS LT Growth Estimates data by YCharts NFLX EPS LT Growth Estimates data by YCharts FB EPS LT Growth Estimates data by YCharts GOOG EPS LT Growth Estimates data by YCharts
Overall, while we like the Match growth story led by an explosion in Tinder revenue, we do not think MTCH stock deserves to trade at 37.5x FY17 earnings. At best, MTCH stock deserves a multiple double that of its 16% growth potential. That implies a "fair" P/E multiple of 32. A 32x multiple on next year's cons. earnings estimate of $1 per share implies a one-year forward price target of about $32. We feel that is a "best case" scenario.
Because that is only about 7% higher than the current price, we feel the risk-reward profile on MTCH stock skews towards the downside. Once bullish on MTCH stock, we are now largely neutral with a slightly bearish skew.
Disclosure: I am/we are long AMZN, NFLX, GRUB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.