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IACI: Is Tinder, With 1.2bn Daily Profile Views And >100% Growth, Only Worth $1.1bn?

|Includes: IAC/InterActiveCorp (IAC)

Summary

  • Tinder (IACI owns >90%) has reached 1.2bn daily profile views and has maintained a growth rate in excess of 100%.
  • I propose three user-friendly monetization methods: YouTube model, local deals and moment rewards.
  • According to Barclays, Tinder is worth $1.1bn. My view: $3bn today and growing.

After the latest transaction, Interactive Corp (IACI) is now estimated to own well over 90% of the wildly-popular dating app Tinder. While Tinder has yet to start to monetize its rapidly-growing and highly-engaged user base, its parent company IACI outlined some early monetization targets and methods during its Q2 conference call. Here are some selected comments from the conference call (July 31, 2014):

"Tinder is growing like a weed, MAUs are up 140% year-to-date with June over May growth almost 2X May over April growth"

"We're starting to monetize it this year"

"If you took Tinder's current user base (June 2014). And, you monetized its North American and European users at the rate that we monetize on OkCupid, and we monetized Tinder's users in the rest of the world at 25% that rate, you would be looking at about $75 million of additional EBITDA this year"

At this rate ($75 million per year), Tinder would add some 14% to IACI's annual EBITDA, which amounted to $545 million in 2013. Given the current growth rate of over 100%, the actual contribution to estimated 2015 earnings should be clearly higher.

I recently had a chance to listen into a short Q&A (in conjunction with the Stocholm Tech Fest) with Tinder's CEO Sean Rad. In terms of growth, Mr. Rad mentioned that Tinder has achieved 1.2bn profile views per day. The last I checked (March 2014), this number was still in the range of 800m daily profile views. This corroborates IACI's comment concerning the 140% growth in MAUs (Mobile Average Users) during the first half 2014.

Barclays Capital, which has recently (Sep 4) published a comprehensive research report on IACI (upgrade to Overweight, target price set at $87), values Tinder at $1.1bn. However, one building block of this valuation is Barclays' estimate of 750m profile views per day. Given that the real number (as disclosed by Tinder's CEO) is 60% higher, Barclays' valuation should be considered as overly conservative.

Monetization

In my view, Tinder's monetization model needs to build on the app's unique strengths.

Engagement. Tinder users are very engaged and based on comments from the company, spend an average of 60 minutes per day on the app. This is a lot of time to monetize. In my view, this time spent needs to be split into two segments: profile views and chatting. Given the high likelihood of user irritation, it would be risky to interrupt chatting with e.g. advertising. On the other hand, profile viewing, i.e. swiping right and left, is an activity, where it would be natural to insert ads between profiles. This would be the model used by YouTube, which features ads in the beginning of many video clips.

Hyper-local context. Tinder knows who their users are, where they are and when they are actively seeking to meet people. That gives Tinder a unique position to serve these users with local deals, which are highly relevant in this context. For example, it can be used to promote local events, activities, restaurants and other venues, which are a natural complement in the dating/social discovery context. For example, a user could swipe right to save these promotions in a folder called 'My deals'.

Magic of Match. When two users swipe right on each others profiles, a match is created. This moment is emotionally powerful and while in itself a source of instant gratification, I argue that this event could be leveraged in a monetization context. Canadian-based Kiip has built a thriving business around what they call 'Moments Targeting', i.e. pushing rewards to consumers, who have e.g. logged a tough exercise in RunKeeper or reached a new level in Candy Crush Saga. In Tinder, there is some 12m of these moments (Matches) occurring every day, providing a massive inventory of situations, where Tinder users are feeling good and are therefore susceptible to relevant rewards.

Next step: from dating to social discovery

Mr. Rad also confirmed (at Stockholm Tech Fest Q&A) that Tinder has a very ambitious growth roadmap and it is actively seeking to diversify its dating-only use case. In my view, Tinder is likely to become the first successful 'social discovery' app, which is not limited to enabling people to meet but operates as a broader platform for 'strangers' to communicate, seek advice and solicit recommendations from each other. If successful, I argue that this would greatly increase Tinder's appeal to potential acquirers like Facebook, which currently lacks an effective 'friend discovery' mechanism.

Facebook's track record of defensive acquisitions

I would highlight few specific cases to support our claim that Facebook could pay $3-4 billion for Tinder. First, it did acquire Instagram for $1 billion in April 2012. At that time, Instragram had 27m iOS users and had only just launched its Android app. While Tinder does not disclose its user numbers, Google's Play store shows that the Android app (launched in July 2013) has been downloaded between 10-50 million times. As the iOS app was launched a year earlier and Tinder's early growth phase was very North America-focused, we would argue that the iOS version has been downloaded 20-30 million times. In total, we estimate that Tinder today has some 40-50 million active users, compared to 27 million that Instagram had when it was acquired by Facebook.

Another example is Snapchat, an acquisition that Facebook did NOT make. According to rife speculations, Facebook did offer to buy Snapchat for $3 billion in 2013 More recently, it is being speculated that Snapchat is in the process of a financing round that would value it at USD 10 billion. From Facebook's perspective, Snapchat is a serious competitor, especially among younger people, who are increasingly opting for Snapchat instead of Facebook when communicating with their friends. If this trend continues, Facebook could gradually lose its lustre among the younger demographic.

In order to avoid this, Facebook acquired WhatsApp for $19 billion. Time will tell whether this was money (and Facebook shares) well spent. However, it did provide Facebook with the messaging app it needed to stay relevant in this space.

In my view, if Facebook had managed to acquire Snapchat for $3 billion, they probably would not have needed to buy WhatsApp for $19 billion. Similarly, an acquisition of Tinder would achieve two strategic goals for Facebook. First, those 60-70 minutes per day that an average user spends on Tinder, are directly impacting their time spent on Facebook. An acquisition of Tinder would "re-patriate" this time. Second, and much more importantly, what if Tinder adds social networking features into its platform? As Facebook news feed starts to get increasingly cluttered with posts from long-forgotten friends, a network of Tinder contacts would provide a much more focused and relevant platform for communication.

Conclusions

In my view, it's still very early days in the Tinderland (think Facebook in 2007). Tinder does one thing today but it does it extremely well. As this is a winner-takes-it-all app, the company's key focus needs to be on growth. Hence, it needs to tread carefully with its monetization ambitions. I have therefore highlighted monetization alternatives (context-relevant promotions, moment rewards), which strive to enhance the user experience instead of interrupting it.

It's too late for Facebook to buy Tinder for $1bn (like they did with Instagram). However, I would think that they could still get it for $3bn, which would imply an EV/EBITDA of 20x (vs. FB's own multiple of 17x) on Tinder's expected 2015 EBITDA of $150 million. Compared to IACI's market cap of $6bn, this would be a very significant value driver.

I remain long IACI and expect to be well-rewarded for this position in the next 6-12 months. Key risk to my investment thesis is that Tinder tries to monetize too aggressively and in a way that would lead to user discontent. This could allow a competitor to step in and gain market share at Tinder's expense, resulting in a significant reduction in Tinder's value. However, as IACI is today trading at 2014 EV/EBITDA of 10-11x (with very little positive impact from Tinder) vs. Internet Media and Online Services companies peer multiples of 13-23x, we argue that Tinder's implied valuation today is very low.

Disclosure: The author is long IACI.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.