Match Group: Look For Love When The Market Crashes

Summary

• Match Group's business model seems resilient to economic slowdowns.
• The stock is down less than the Nasdaq and S&P 500 over the past week.
• It currently trades at fair multiples and deserves a closer look.
• Looking for a portfolio of ideas like this one? Members of Betting On Tomorrow get exclusive access to our model portfolio. Get started today »

Online dating platforms have the perfect combination of attractive financial ingredients. They're capital-light, comfortably profitable and easy to monetize. Newer platforms like Tinder are clearly riding a demographic wave that could stretch for decades.

Fortunately, the biggest and best dating platforms are owned by the same company: Match Group (NASDAQ:MTCH). Best of all, the company's niche business could actually be immune to business cycles. Let's take a closer look.

The economics of love

Last year, a Stanford sociologist found that online dating had become the most popular way U.S. couples connect. One out of every five couples now meet online.

(Source: Visual Capitalist)

A few other statistics about this market piqued my interest further:

• 49.7 million Americans, of the 54.4 million estimated singles in the country, have tried online dating. That’s nearly full adoption!

• 80% of people on Tinder say they want to find serious dates

• Dating app customers spend an average of $243 a year to find their matches. Many believe it’s still cheaper than meeting someone offline.

• An estimated 240 million people are using dating apps across the world, and total global sales are estimated to reach $2.1 billion this year alone (up 9.3% from 2019).

Despite these encouraging statistics, launching a successful dating app over the past twenty years has been anything but easy.

Boulevard of heartbreaks

Online dating is a segment of the internet economy where the rules seem inverted. Instead of winner-take-all dynamics and ad-based revenue, the dating app market is saturated with players trying to reach every niche imaginable and serve users willing to pay.

Users are spoilt for choice. Whether you’re looking for a Star Trek nerd, men with beards or a literal clown, there’s a legitimate dating app for that. There’s an estimated 8,000 dating sites in the world: 2,500 in the U.S. alone and another 1,000 new ones launched every year. For a market growing at single digits and worth only a couple billion, that’s far too much.

Another critical issue is the churn rate. Dating apps are perhaps the only mobile apps designed to be useless when successful. In other words, people stop using them when they find love. Often, they just stop using it when they don’t. 10% of users give up on their app within the first three months.

Unsurprisingly, the industry has had its fair share of failures. Most are replaced with smaller niche sites that never manage to gain traction or generate revenue. The only way to win, it seems, is to create a conglomerate that owns the most popular sites and apps in the world and uses its financial strength to acquire the next hot thing when it pops up.

That’s precisely what Match Group seems to be doing.

The Perfect Match

Match Group has managed to secure the most lucrative segment of this industry through sheer capital allocation. Incubating Tinder when it was a tiny startup and acquiring a majority stake when it started gaining traction was probably the biggest game changer for the company.

Tinder is now one of the highest grossing apps in the world and accounts for 56% of Match’s overall sales. Match has used the cash flow from this insanely popular app to purchase its niche rivals such as Hinge, Harmonica and several others. That’s turned the group into a diversified money-making machine.

While Tinder is still the primary growth engine (sales have compounded at a rate of 123% since 2015), the group’s acquisition-based growth strategy could pay off as well. The team has $466 million in cash and cash equivalents and $1.6 billion of long-term debt to fuel the next major acquisition. Effectively, Match could sustain its double-digit annual growth rates until it owns the dating market for nearly every country and language on the planet.

Best of all, this acquisition spree could be driven by intrinsically, since the company is cash flow-positive. Over the past twelve months, Match has generated $658 million in operating cash and $620 million in free cash flow.

A seductive valuation

None of this matters if Match’s stock price is untethered to reality, like many of its peers. Fortunately, investors seem to have overlooked this appealing opportunity.

The stock is down 6.4% over the past week. However, the S&P and Nasdaq lost 9.24% and 6.7% respectively over the same period. In other words, the stock seems to have outperformed its benchmark indexes during one of the worst crashes in recent memory.

MTCH is currently trading at 27 times forward earnings and 29 times trailing free cash flow. For a digital business with wide margins (32% operating), that seems like a great deal.

Meanwhile, cash flow has been compounding at an annual rate of 42% over the past three years. That means the PEG ratio is anywhere from 0.64x on an earnings per share basis to 0.69x on a free cash flow basis.

In short, Match is fairly valued when adjusted for its growth potential.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.