Match Group Is A Clear Sell On Facebook News

Summary

• MTCH is the parent company of Tinder in which you swipe right for people you would like to meet in person.
• Tinder has seen explosive user growth, and better yet, MTCH has been successful thus far in their efforts to monetize through subscription services.
• After Facebook announced that they were entering the arena, however, MTCH shares have dropped 25%.
• Because the story has changed, it is still too risky to catch this falling knife.

Thesis

Shares of Match Group (NASDAQ:MTCH), the owner of the dating app Tinder have been in free fall after Facebook (FB) announced that it was entering the online dating scene. When a stock drops in value, this does not necessarily mean that the underlying fundamentals have changed. However, if the fundamental story has changed, as I believe it has, then the selloff is justified, and more downside is likely to come.

Business Overview

MTCH owns a large portfolio of dating apps, including Tinder, the number one downloaded dating app worldwide:

(Source: 2018 Investor Presentation)

MTCH has seen strong subscriber growth both domestically and internationally:

(Source: 2018 Investor Presentation)

The real growth story, as many readers may know, is in Tinder which has seen a compounded annual growth rate in subscribers of 108% since 2015:

(Source: 2018 Investor Presentation)

MTCH has thus far seen success in monetizing Tinder through its subscription service Tinder Plus, which essentially is a no-ad premium version of Tinder and also Tinder Gold, which allows users to see who likes them before they swipe.

(Source: 2018 Investor Presentation)

The growth of Tinder is unmatched (pun intended) by any other app:

(Source: 2018 Investor Presentation)

This has led to strong growth in adjusted EBITDA.

(Source: 2018 Investor Presentation)

So far, MTCH has all the makings of a secular growth story which is firing on all cylinders. What could go wrong?

The Problem: Facebook

On Wednesday, Facebook announced that they were going to enter the online dating scene, sending MTCH shares into free fall:

(Source: Yahoo Finance)

That's a 25% drop in less than two trading sessions.

While it may be tempting to just claim that Facebook could never compete with Tinder, I should note that Facebook's 2.2 billion monthly active users dwarf the 7 million subscribers seen at MTCH. Further, with great access to their users' personal information, it stands within reason that Facebook should be able to create a comparable product.

And, that's the principal problem - the barrier to entry in the online dating app scene has never been the technology as it is very easy to replicate but instead is primarily the user base (it isn't fun dating in an online network with nobody in it). MTCH has faced competition from other apps before, which were gaining market share as users flocked from apps of MTCH to their products (online dating apps tend to be very trendy). This is a serious problem which demonstrates how quickly a dating app can lose market share. Historically, however, MTCH has solved this problem by just buying out their competitors.

In July 2009, MTCH acquired People Media from American Capital for $80 Million. MTCH acquired SinglesNet in 2010 and OkCupid in 2011. Their biggest acquisition of late was PlentyOfFish which they acquired for $575 million in 2015.

Facebook, however, is one fish they will not be able to acquire, and thus, their previous strategy of eliminating the competition will not work. If Facebook releases an application virtually similar to that of Tinder, how would subscribers respond? Based on what has happened historically, odds are that Tinder will lose significant, if not all, market share.

Balance Sheet

MTCH has $1.25 billion in long-term debt on its balance sheet versus $272 million in cash.

With adjusted EBITDA in 2017 coming in at $468.9 million, this is a debt to EBITDA multiple of 2.7, which is not necessarily high, but not necessarily common either in a tech industry where many companies have net cash on the balance sheet.

Valuation

With adjusted EPS at $0.65, MTCH trades 53 times trailing earnings. They trade 35 times free cash flow. In terms of enterprise value, they trade at 24 times EBITDA. It is clear that MTCH isn't cheap, and in the past, these valuations made sense considering their reliable growth. But, with Facebook now in the space, it is unclear if MTCH will be able to maintain the previous growth rates or even be able to compete with the tech giant. While failure is also not a certainty, the risk profile has certainly increased as this is a competitor of which MTCH has never had to face before.

There Should Be A Near-Term Bounce

It will take Facebook some time to gain market share and release a finished product. Until then, I do believe going long MTCH may prove profitable for some traders. However, for my own portfolio, I am avoiding shares because the lofty current valuations do not leave much margin of safety should the Facebook's concerns prove to be justified.

Conclusion

MTCH has seen impressive growth both in Tinder user growth, as well as revenue growth from its monetization efforts. Prior to Facebook's announcement that they were going to compete in their industry, MTCH was a fast-growing tech stock with secular tailwinds. Their recent dramatic fall illustrates how quickly sentiment can change, especially when the stock already contains a generous valuation. My advice to readers is to consider the fact that the story has indeed changed for MTCH, making doubling down not necessarily a done deal. For me, personally, I will have to sit this one out and just hold exposure to the online dating scene through my Facebook shares.

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Analyst’s Disclosure: I am/we are long FB. 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.