- Match's well-made offerings and sound acquisition strategy have earned company dominant positioning in nearly all online dating verticals.
- The company has demonstrated exceptional growth and profitability in recent years.
- With secular growth in online dating likely, Match appears destined to reap outsized benefits as the industry leader.
- Its high valuation, large debt loads, and structural issues with online dating are factors investors should remain cautious about.
Having market dominance in a fast-growing industry is quite an enviable position. Match Group (NASDAQ: NASDAQ:MTCH), an online dating giant, is fortunate enough to be in this spot.
Investors have certainly begun to take notice. Since its separation with IAC completed on July 1, 2020, MTCH shares are up roughly 44%. We believe that Match has a fundamentally attractive business model and solid future prospects but note that investors should be wary of several key risks that may derail our bullish thesis.
Match Group provides online dating services through its portfolio of over 20 brands. Each brand is targeted towards specific types of online dating or to certain demographic groups (i.e. Tinder for short-term hook-ups, Hinge for long-term relationships, Hawaya for dating in Muslim communities).
Exhibit I: Match Group Brands
(Source: Match Group Investor Presentation)
The company primarily generates revenues through recurring subscriptions (in which users pay for unlimited access to a bundle of features for a specific period) and a la carte features (in which users pay a non-recurring fee for a particular consumable benefit or feature). It also generates limited revenues from advertising. Geographically, revenues are overwhelmingly concentrated in the United States - in FY 2020, 47% of revenues came from Match's American operations. However, this proportion has been dropping in recent years (in FY 2018, ~51% of revenues came from the United States). Its major expenses are in-app purchase fees (paid to Apple and Google), advertising expenditures, and compensation expenses.
In recent years, Match Group has grown dramatically. Since 2016, its revenues have increased at a 21% compounded annual rate. More impressively, its operating and EBITDA margins have increased concurrently, from 28% to 31% and 36% to 38%, respectively. In the United States, Match Group's revenue market share is approximately 1/3, which positions it firmly in the top spot among online dating firms.
Exhibit II: Match Group Financial Metrics
(Source: Match Group Investor Presentation)
Online Dating's Secular Growth Story… and Why This Is Likely To Continue
In 20 years, online dating has gone from culturally taboo to the most popular way for both heterosexual and LGBTQ+ couples to meet. A number of catalysts are behind this rise. First, online dating dramatically expands one's potential partner pool. In a world where the ideals of romantic love, meeting "the one," and having strictly defined "types" are pervasive, having access to an expanded pool of dateable people gives match-seekers a greater chance (or at least perception of a chance) to fulfill their ideals. Further, it also gives people a more significant opportunity to "date or hook up with a wide variety of people who are different from" themselves. Second, America's college-educated workforce, primary users of online dating apps, have become busier and busier with work, online dating has allowed them to economize their courtship efforts. Third, and perhaps more impactful, a broad-based shift towards the digital world has made people more comfortable socializing and meeting people online.
Exhibit III: How has the way heterosexual couples meet changed over time?
(Source: Suthen Siva)
This explosive growth in users has translated to exploding revenues for online dating services. Since 2013, industry revenues in America have grown at double-digit rates, reaching a peak of 17.27% in 2014. For context, this is roughly 8 times the rate of the US economy as a whole, an impressive feat. Even more impressively, double-digit revenue growth is expected to continue through to 2025, at which point total industry revenues in the United States alone will total roughly $6.5 billion.
Exhibit IV: Percentage Change in Revenues Year Over Year
While market research forecasts are often changing and fickle, we believe that several fundamental catalysts support this growth. First, COVID-19 has propelled greater adoption and trial of online dating platforms. Over 55% of respondents in a Statista survey mentioned that they are using dating apps more during the pandemic than before it. Second, many who have tried dating apps find them effective and report positive experiences. A vast majority of people say that it is easy to find people they are physically attracted to, shared their hobbies and interests, and seemed like people they would want to meet in person.
Exhibit V: Perceptions of Online Dating as Rated by Online Daters
(Source: Pew Research Center)
The positive experiences that users have on these platforms tend to create positive word of mouth, encouraging even more users to sign on. In turn, this increases the likelihood that individuals will find a partner that is their "type" on the app, and a virtuous cycle emerges according to network effect principles. The rise of online dating seems nearly inevitable given the combination of these phenomena, boding well for Match, the industry leader.
Several Factors Protect Match's Market Leading Position
As of September 2019, Match owned four of the top five dating apps by user base size in North America, three out of the top five dating apps by in-app purchase revenue worldwide, and three out of the top five dating apps by average monthly usage time per user. The fact that Match has been able to pull off such a feat is nothing short of incredible - only a few companies in history have exhibited such dominance over their respective domains. Further, we believe that Match Group will maintain this dominance in the future for three reasons.
Exhibit VI: Market Position of Match Group Subsidiaries (Red Dotted Line Indicates Match Subsidiary)
It is important to note that Match Group subsidiaries cover almost all "white-space" in the online dating market (while dominating each vertical as well). For example,
- Tinder is known as the app for hook-ups, and is the largest dating app in the world
- Hinge has a stellar brand perception among millennials with high "relationship-intent."
- Match is the #1 dating platform, by brand awareness, for singles over 30 looking for long-term relationships.
- Pairs is the #1 dating app in Japan.
- OurTime, a 50+ focused dating app.
- OkCupid dominates the market looking for mathematical insights to compute potential matches.
These are just a few examples, but they go to show how broad-based Match Group's dominance truly is. This is not only true for heterosexual couples but LGBTQ+ couples as well. A strong existing market position is especially important in online dating, an industry in which network effects are crucial. The more users that an online dating platform has, the more valuable it is to new users (since the potential pool of partners is larger). This powerful source of competitive advantage makes it difficult for incumbents to break in.
Take two recent examples of well-capitalized new entrants: Facebook and Bumble. Facebook launched its dating service in 2018. This caused Match Group's (then still part of IAC) stock price to drop over 20%. However, it was very quickly derided as a failure by users, tabloids, and industry analysts. Since its launch over three and a half years ago, it has yet to capture significant market share from any Match group subsidiaries. The primary reason for this is a quirk of modern dating - that dating is typically compartmentalized and separate from the rest of one's social life. This makes it unlikely that a big social media player could come into the space and succeed, especially when no glaring weaknesses exist in Match's existing offerings.
Evercore ISI's models show little to no change to Match's numbers in the countries that Facebook Dating has entered… If you asked me two years ago, my fear would've been a large competitor moving into the space. Who's larger than Facebook? But yet it hasn't affected user or subscriber trends. - Benjamin Black, analyst at Evercore ISI
Bumble, with its revolutionary premise of encouraging women to "make the first move," has certainly fared much better than Facebook Dating. At present, it is the second-largest dating app in the world by in-app purchase revenues and has recently demonstrated increasing revenues and profitability. It has achieved this status by targeting the limited "white space" that Match Group had not yet exploited in the online dating world. Yet, despite its much smaller size, its revenues only grew 3% more than Match's between 2019 and 2020. Further, despite Bumble's revolutionary premise, there is still some overlap between Bumble users and Hinge (a Match Group subsidiary) users - both of them are overwhelmingly pro-commitment. Yet, Hinge seems to have a much higher "success rate" - the percentage of matches that result in a date - than Bumble. The success rate on Hinge is 90%, with 72% of these dates leading to second dates, while on Bumble, it is only 80%. This difference in efficacy demonstrates the value of Match Group's expertise and network effects.
Not only has Match proved relatively successful at fending off competitors, but its continued drive to acquire innovative new companies that further its mission of creating meaningful human connections. One recent example is Match Group's acquisition of Hyperconnect, a Korean video-chatting platform that specializes in social discovery. Many analysts praised this acquisition, with Brent Thill from Jeffries noting that it brings geographic diversification to Asia and allows the firm to expand into the social discovery market, which is twice as big as the dating market. Youssef Squali of Truist said that the synergies from applying Hyperconnect's video technology to Match's dating apps could also prove quite worthwhile.
Despite the numerous tailwinds and fundamental strengths of Match Group, investing in it is far from a sure bet. For one, its valuation (~17x EV/Sales, 70x P/E) is certainly lofty at present. Potential investors may be better off waiting for a general pullback in technology equities before buying into Match. Additionally, the firm is heavily indebted, with a debt to assets ratio of 139.5% primarily due to its separation from IAC. However, its coverage ratio at 4.3x is quite sound and indicates that it is not at grave risk of default.
Exhibit VII: Solvency Ratios for Match Group (December 31, 2020)
The biggest risk to Match comes from two structural issues on their apps that reduce overall user satisfaction. The first problem stems from the significant gender imbalance on its platforms. Its most balanced platform, Hinge, has roughly two times as many males as females, while Tinder and OkCupid have almost 2.5x. This results in significant male dissatisfaction with the app - over 60% of men say that they "do not get enough messages" on online dating platforms. The second issue lies in the amount of harassment that females receive on the platform. Roughly half of female online dating platform users reported that potential partners would continue to contact them after saying they were not interested or would send them unwanted sexually explicit messages and images. One-tenth of female users said that a potential partner threatened to harm them physically. This has resulted in over 50% of women saying that dating sites and apps are unsafe ways to meet women. Bumble has done a great job at allaying these concerns with its female-centric approach. The bull case for Match Group would only grow stronger if the company undertook significant measures to attract more females to their dating platforms and reduce the harassment that they face.
Given Match's broad-based dominance, track record of fending off competitors, and innovation-focused management team, it is hard to see it falling from its commanding position in online dating. It is well-positioned to take advantage of explosive industry growth in the coming years, thus justifying its lofty valuations.
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