Match Group: From A Gen Z Perspective (NASDAQ:MTCH)

Thesis

I am in awe of the amount of experience in different fields that Seeking Alpha contributors, investors, and the overall community have. While some get the opportunity to dip into these experiences to form an investment thesis, as a Gen Z, I don’t really have this ability. However, there is one industry that I do get to draw quite a bit of experience on, and that’s media, specifically dating apps. In this case, I have about 5 years of experience as a customer, and understand the sentiment, at least from a male Gen Z perspective.

The online dating industry really comes down to three main brands: Tinder, Hinge, and Bumble Inc. (BMBL), with Match Group, Inc. (NASDAQ:MTCH) owning and operating the first two. Hinge is miles ahead of Tinder and Bumble, as far as quality goes and although my opinion is N=1, this is well reflected in Match Group’s Brand Identity goals and overall market share. Furthermore, Hinge is boasting growth numbers nearing 40% because of such reasons. Although Tinder needs some work, it still represents 30% of the market share and is growing at a stable rate.

I believe Match group is the best play in the online dating industry because they own 65% of the market share, with a key high growth player in Hinge, and are also extremely undervalued compared to Bumble.

Business and Q3 Results

Match Group owns and operates a series of digital technologies aimed to help people make meaningful connections. These brands include, but are not limited to, Tinder®, Match®, Hinge®, Meetic®, OkCupid®, Pairs™, PlentyOfFish®, OurTime®, Azar®, Hakuna™ Live, and more.

Each brand tailors towards different demographics, cultures, age group, and intent of connections. They also have different modes of achieving connections. Some brands, like Tinder, don’t require much user information, and a match can be made from a single swipe, thus attracting a younger and casual crowd. Where others, like Hinge, require prompts, basic information, and encourage commenting on others, thus leading to more serious relationships. As a result, no single technology has been able to encompass these differences and serve as a single relationship brand. The portfolio could be described as conglomerate-like, however, each brand operates in a similar fashion and there is a lot of carryover techniques to incorporate. But like a conglomerate, certain brands lead the majority of growth and success, whilst picking up slack for the others.

For example, Tinder represents half of Match Group’s income alone, and according to their Q3 results, it had a 6% growth over the year. Hinge, a high-growth player, amassed almost 40% increase as well. But this goes without saying that other brands struggled. Established Brands, including Match, Meetic, OkCupid and Plenty of Fish, and APAC-based businesses Pairs and Hyperconnect, saw both Direct Revenue and Payers decline 15% Y/Y. Overall, total business results were pretty bland, with a measly 1% increase in revenue and a 2% decrease in margins, but it’s clear the main superstars are Tinder and Hinge.

Tinder is The Worst

Let’s remind ourselves on how Tinder works. Essentially, all a player needs is a valid phone number to ensure the user is not a bot. When filling out a profile, minimal information is required. Some pictures, a gender, age, and a location will allow you to start swiping. This swipe feature, by design, is to drive many matches, as quick as possible. Essentially, it’s an efficiency play on dating apps. But this comes with inherit flaws, because with speed and efficiency come lack of quality. Unlike other brands, where a user has to rigorously read through profile inclusions, doing tedious homework and making high quality matches, users on tinder essentially look at others’ first picture and decide if they are attractive or not. This type of superficial selection process has caused Tinder’s inherit issue: Brand Identity.

As the title suggests, from a Gen Z point of view, Tinder’s brand identity has held a negative connotation among peers for the most part. This is due because of the market’s perspective on the intent of the matches. The general demographic is ages 18-24, but the perspective is the intent of the matches are casual in nature. As a Gen Z, I rarely see couples, married couples, and other peers gloat about meeting through Tinder. It is usually swept under the rug in a nonchalant way because, in all honestly, it holds a “trashy” narrative. Although my opinion is N=1, Tinder is well aware of this narrative and recognizes it, which is prevalent in their recent Q3 transcript. However, they are taking steps to improve it.

Some of the improvements include a “relationship intent” feature. This is very common in other apps, because although there is defiantly a market for those seeking for casual relationships, ignoring this feature dissuades what Match Group’ strives for their brand identity. They are looking to form “meaningful relationships.” By outright promoting casual relationships, which Tinder is known to do, goes directly against Match Group’s intentions, or at least what they say they are. I will say it’s good to see the CEO admitting this issue and working to change it, even if it might be too late. Match Group investors are encouraged about the financials however and should want Tinder to succeed in pivoting their brand identity. Whether this works or not, they also have another player in the game, which I believe will carry them to victory.

Hinge is Outstanding

Hinge seems to promote what Match Group’s intentions are. To help envision this, lets explain how Hinge works. Like Tinder, to create a Hinge profile a valid phone number is needed. When creating a profile, six pictures are needed, along with three written prompts. This forces the user to reveal some information about themselves. Unlike Tinder, which has an optional prompt section, Hinge forces the player. This leads to players working a little harder on their profile, maybe thinking twice if it’s worth it. Generally, casual players would be turned away from this, but more serious individuals thrive here. Hinge also allows the user to reveal more basic information as well such as Age, location, height, career, recreational substances, religion, political leaning, education, vaccination status, and relationship intent. Furthermore, video prompts, voice prompts, and linkages to social media can be used, and each picture uploaded is able to have a caption.

Now, one can provide this information in Tinder as well, so that doesn’t really explain why Hinge is better. The main reason it’s better is because how of matches are made. Hinge uses a like and comment design. Essentially, a player can like and comment another player’s picture or prompts. The idea is that this seems a little more intentional, and on the free version, a player can only do this five times a day. The number of Tinder swipes allowed is algorithmic, but they are a lot more than five times a day. This means, typically, a match on Hinge holds more value than a match on Tinder. So, with Tinder playing an efficiency game, Hinge challenges it, by playing the quality game. The results show this is a very good strategy. Hinge’s monthly active users have grown from 80%-120%, through multiple age ranges. They have also grown Revenue per player from around $5 to $25.

In simple terms, Hinge is essentially a mix between all of Match Group’s brands. It allows users to know enough background information to feel comfortable starting a conversion, but it is also not extremely overbearing like Match. It also can be quick by simply liking posts, similar to Tinder’s swipe feature, but it also limits the player, so quality is upheld. We explained how Match Group acts like a conglomerate in that they have many different brands for different demographics, ages, cutlers and overall markets. But Hinge’s design seems like it could be improved to be the ultimate encompassing dating app. Although this may be quite speculative, there is no doubt Hinge’s success will be paramount for the Match Group’s success overall.

Bumble is Okay

Bumble is essentially Tinder, but it requires the female to message first. It also has loads of information and prompts, similar to Hinge, but it still uses a swipe feature, leaning towards efficiency rather than quality. They have started incorporating commenting like Hinge, but it doesn’t get used that often. They have other modes like BFF for those looking for friends, rather than romantic relationships, but I can’t really speak on the success of this. Overall, I’d rank Bumble between Hinge and Tinder, from a Gen Z perspective.

The biggest issue I have with Bumble stock is it is still extremely overvalued comparatively, which is driven in more detail in the valuation segment. They also only don’t own as many apps, and revenue number and overall market share is extremely small compared to Match Group. Match Group essentially owns 65% of the market, with Bumble at 27%.

Financials

On June 30, 2020, Match Group completed the separation from InterActiveCorp, through a series of transactions that resulted in two, separate public companies. Because of this, Match’s group’s financials can be a little concerning when looking over the past ten years. This means investors should study the last two or three years of financial statements for accurate assumptions. Match Group has successfully grown revenue, Net income, Free cash flow, and boast very high ROIC numbers.

Another thing to note is their stock repurchase program. I think this was a great idea by Match Group’s management, as the stock price started to plummet. For one, their average price basis so far is reasonable at 4.3 million shares at $62.69, shown in their Q3 results. They also have another 5.3 million to average down at today’s price. And after the valuation segment, you’ll see why I believe they successfully bought undervalued or fair valued shares, which is outstanding for a growth tech company like this.

However, I do have one pain in my side regarding this. As Match Group as bought back shares, they have also increased their stock-based compensation (“SBC”) by a larger amount. Effectively, they do more damage to the shareholder by issuing more stock-based compensation versus share repurchases. This is clear by looking at the difference between the two.

Valuation

Discounted Cash Flow

For valuation, we will perform two methods in a discounted cash flow (“DCF”) and a multiples approach. For the DCF, we project out Free Cash Flow (“FCF”) 10 years, using revenue and free cash flow margin assumptions. We find our terminal value by using the capital asset pricing model (“CAPM”), with a weighted average cost of capital (“WACC”) of 10% and a terminal growth rate (“TGR”) of 2.5%. We then discount our calculated free cash flow values by the 10% WACC, along with the terminal value, and sum all these values up to arrive at an Enterprise value. Excess Cash is added, and debt is subtracted from the value, to arrive at the Equity Value. From here, the equity value is divided by the number of shares outstanding, to give us our fair value share price.

The key driver for this analysis is reasonable assumptions for Revenue and free cash flow margins. To establish these assumptions, we will imagine three different scenarios: A worst case, an average case, and a best-case scenario. To help with this, we can pull inspiration from external factors. For one, a decent start is to read what management’s expectations are, which is 5-10% in the future.

Another inspiration could be derived from the Industry Outlook CAGR, which is around 6% for the next five years. Another factor is to even look at Tinder’s previous growth, since it is a large portion of Match Group’s revenue, which is also at 6%. For these reasons, we could expect revenue growth to be between 5% on the low end and 7% on the high.

For free cash flow margin, Match Group delivered 28% and 38% in 2021 and TTM alone, along with 127% in 2020 after the spinoff. While I believe there is quite a ceiling on revenue growth, margins still have room for improvement. Match plans to achieve a consistent 35%, which I believe is very reasonable through a series of improvements such as new or improved pricings schemes, focus on advertisement monetization, and overall monetization of free customers. For this reason, we can assume margins between 25%-35%. We can plug these values in a sensitivity table and get a range of fair prices, depending on each situation. The results show a fair value of $30 – $55, with an average of $41.

Multiples

Another approach to valuation is by comparing Match Groups Multiples to the industry. As mentioned, Match Group and Bumble make up over 90% of the industry, so we can simply export multiples from Seeking Alpha’s valuation metrics and compare the two. Overall, Match group is extremely undervalued when judging P/E multiples, EV/earnings multiples. They are also neck and neck, with Price and EV/Sales ratios. There isn’t really an area where Bumble outperforms, other than Price/Book, which isn’t the valuation metric to start with.

Target Price and Discussion

At first glance, it seems Match Group is trading at fair value. However, let’s remember that Match Group is not some dividend blue chip company. It is a high growth, at least on the margin side, tech and media company. Furthermore, its leaders in Hinge and Tinder are just ten years old, with room for improvement. To be able to value such a company with a discounted cash flow model speaks volume for the company’s cash flow and overall valuation. Furthermore, owning 65% of an entire industry and being extremely undervalued compared to any competition is nothing to shy at.

I think it’s no discussion that online dating will continue to grow and be the future of connections, which is why I believe Match Group has such a strong moat as well. I sway more on the higher end of the valuation and believe anything under $50 is a strong buy in this current environment.

Risks and Conclusion

One thing not touched on was Match Group’s looming debt acquired after their spinoff. They now have long-term debt at about $3.5 billion, or about 3.5 times its current annual free cash flow. Fortunately for investors, more than 70% of this debt is at a fixed rate and isn’t due until 2027. This should give Match Group enough time to accumulate cash and start paying a large chunk of it. The risk here is if they continue raising their stock-based compensation and share repurchase rates, neglecting their debt obligations.

The main risk, however, is still competition and failure of Tinder. although they do have a large market share, new dating apps pop up left and right. All it takes is one to wash all of the players out of competition, but I think this would be pretty tough since they are simple in nature and most of the success comes from brand recognition. I believe Tinder will continue to be a key player, but Hinge will be the one to really solidify the market share and brand identity Match Group is focusing towards. I think once brand recognition is established, it’s very easy to incorporate different features in their already successful apps, that other competition may incorporate.

I would also say risk is built into the price. At very low valuations, risky plays can offer a good risk reward profile. And because of this, from a Gen Z perspective, Match Group is the best play for the online dating industry.