Match Group: The Case For 20% Earnings CAGR

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About: Match Group, Inc. (MTCH)
by: Mike Berner
Summary

In the latest earnings call, Match Group's management provided detail on their long-term outlook for the business.

Management expects revenue growth in the mid-teens and eventual operating margins of 40 percent.

Here I project future earnings based on management's discussion.

The valuation appears a bit aggressive, but the company's goals look feasible given Tinder's growth and pricing power.

For most of its brief history as a standalone company on the stock market, Match Group's (MTCH) shares have fluctuated wildly in value. Much of the volatility, I think, is due to short-term speculation over user growth, with traders trying to make a quick buck based on headline news.

Many investors seem to miss what I have argued is the bigger picture. Match Group is no flash in the pan, but rather a business with fantastic economics and a strong, sticky product that is likely to compound earnings for years to come.

The Case for 20 Percent Growth

Last week, Match again beat estimates for revenue, earnings, and user count at Tinder, the company's main growth engine. Investors clearly liked what they heard, sending the stock up 5 percent the next trading day.

More exciting, though, was management's presentation. During the earnings call, Match executives shed some light on their long-term outlook for the business. Barring the absence of another game-changer like Tinder Gold, revenue growth is likely to slow. Analysts have warned about this before.

Still, management expects revenue growth in the "mid-teens" for the foreseeable future, and also anticipates operating margins to approach 40 percent within the next few years (up from 32 percent today).

The results are pretty incredible if you work out the math. From the current base of $1.7 billion in annual revenue, a CAGR of 15 percent would double that figure to $3.4 billion in just five years. If the company reaches a 40 percent operating margin by 2023, it would take in $1.36 billion in pre-tax net income. That represents astounding compound annual earnings growth of 20 percent.

source: author's calculations

Is such a future feasible? If you believe that Match possesses pricing power and untapped user growth potential, then it certainly seems realistic. There is plenty of evidence that the company embodies both attributes. As I argue in an article from June 2018, Match's pricing structure bears several similarities to Netflix (NFLX), which has continuously raised prices throughout its existence either directly or indirectly. Match itself alluded to experimenting with pricing in its Q3 2018 earnings call.

Online dating is also growing as an industry - a trend that seems unlikely to reverse. There is an ongoing shift in societal attitudes toward meeting people though online sites or mobile apps. As Tinder and other leading apps accumulate network effects, they solidify their competitive position.

Valuation and Risk

As I have argued before, the stickiness of the products insulate the company from competitive pressures. European dating giant Rimberg International, which owns Tinder rival Bumble, would like to overtake Match to become the world's largest online dating company. Although Bumble and other niche competitors have tried to challenge Tinder's leading position, the latter still possesses overwhelming market dominance.

At a P/E ratio of 34, the stock is not the bargain it was just a few months ago, and I am not sure that I would be a buyer here. The present valuation, although not outrageous, seems a bit aggressive given Match's projected earnings growth. Online dating's addressable market is extremely large, but it is difficult to say how fast Tinder can keep growing.

Given the stock's volatility, perhaps investors will get another opportunity to pick up shares at a lower price. I cheer for another news-driven decline similar to the (now largely forgotten) Facebook (FB) dating announcement. In the meantime, I am holding on to every one of my existing shares.

Disclosure: I am/we are long MTCH. 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.