Match Stock: Hinging On Hinge (NASDAQ:MTCH)

An Indifferent Quarter

Match Group, Inc. (NASDAQ:MTCH) declared indifferent results in Q4-2022, missing revenue and earnings expectations. Here are the quarterly highlights.

• Revenues dropped 2% YoY, as reported, but increased 5% in constant currency.
• Operating earnings declined significantly YoY by 54% on a GAAP basis, which included an impairment of intangibles (Hyperconnect acquisition). On an adjusted basis, it was still a decline of 2%.
• Payers dropped 1% to 16.1Mn, YoY. A small number, but disconcerting because 2023 is going to be an even more difficult year.
• Revenue Per Payer (RPP) also declined 1% YoY as reported but stayed positive, up 7% in constant currency.

During the fourth quarter and pretty much consistently through 2022, there are three distinct trends across Match.

Growing with Hinge – Hinge was the star performer, growing almost 30% YoY to $284 Mn, and is now 9% of Match’s total revenues of $3.2Bn. This is their growth engine. The dating industry is hugely dependent on product differentiation and segmentation, and like Tinder, which was the sensation ten years back, and Bumble, which supercharged its namesake, Bumble (BMBL), Hinge has been the hot product in the dating industry and likely to remain so and lead Match’s growth for the next decade.

Slowing Tinder – Tinder, their largest brand with $1.8Bn in sales and 56% of Match’s revenues, grew Q4 revenues only by 8% in constant currency, (3% as reported) and 2022 revenues, 16% in constant currency, (9% as reported). Most of the damage to the top line was in the second half and the fourth quarter.

Maturing Other Brands – All other brands, including Asian and Mature, or “Evergreen” brands as Match calls them, which include Match, OkCupid and Plenty of Fish, declined 2% YoY, in 2022. For the quarter, the decline was faster at 5% with 8% fewer payers, though RPP grew 3%.

Match with its brands has about 65% of the North American dating apps market. While that’s a huge strength, slower-growing brands are a big concern as it is usually, for all market leaders and duopolist incumbents. I believe Match has taken the right step with its reorganization to cut down silos and focus on returning the company to better margins and growth.

Company Reorganization

Bernard Kim, with solid tech chops steering Zynga in its growth years, does have his job cut out for him. Match’s flagship Tinder, the world’s largest dating platform, is sputtering, a pale shadow of the powerhouse that grew at a CAGR of 21% between 2015-2022.

Kim has so far walked the talk, reorganizing the company around five pillars.

a) Growth – Hinge

From Match’s 4th Quarter Financial Letter:

As the app has grown in popularity, it has become apparent that paying users on Hinge are looking for long-term relationships more than ever. Hinge’s new subscription tiers focus on efficiency, compatibility, and creating a category defining experience rather than an incremental upgrade.

These two tiers are now available to a small subset of Hinge’s global user base. With the introduction of these tiers, Hinge now can broaden its payer base with a lower priced Hinge+ tier and target premium users with HingeX. In its initial testing, HingeX is delivering on expectations, driving significant conversion improvements and a strong take-rate. Hinge expects to launch the two tiers globally by the end of February and plans to further optimize both over time.

Hinge continues to build rapid momentum in Europe and climb in app store rankings. Hinge became the #3 most downloaded dating app in Germany in just five months. It also organically achieved the #3 most downloaded dating app in the Nordics in November, despite having fully launched only in Sweden, driven by strong word of mouth across the region.

Hinge plans to continue its push into the Nordics and begin marketing in France, Italy, and Spain in early 2023. By mid-year, we expect the app to be translated and marketed throughout continental Europe, with Asia and Latin America following in 2024. As Hinge expands into new markets, it is important to note that it takes several months for the user base to achieve sufficient scale and liquidity to drive revenue growth. As a result, international revenue growth in 2023 represents a relatively small portion of the $100 million of overall incremental revenue we expect Hinge to deliver. The launch of the new tiered offerings and continued strong user growth and monetization enhancements in its core markets are expected to drive most of Hinge’s 2023 revenue growth. The newly entered markets across Europe in 2023 are expected to be a more substantial driver of Hinge’s revenue growth in 2024.

Key Takeaways for Hinge

Hinge, because of its profile of relationship-building instead of casual dating, caught on very strongly as one of the strongest-growing dating platforms in 2022.

The downloads across Europe suggest that while the launch has been very successful, the real growth will start from 2024 onwards and should have a solid runway of at least 5 years.

There is a strong possibility of the same growth trajectory in Asia as well, given the appeal of relationships instead of just casual, which is more in tune with cultural mores in Asian countries, especially India, which should be a very big market for Hinge, especially if it is targeted and priced well.

Hinge has also got new product features with two new tiers to broaden its user base at different price points.

I expect Hinge to continue growing over 30% in the next 4 years and reach 19% of Match’s revenues by 2026.

b) Evergreen Brands – Productivity Improvements and Cost Cutting Simply, growth had stalled, revenues were declining and given the demographics of Match.com, Plenty of Fish, and OkCupid, the likelihood of advertising and marketing goosing growth were low. Previously, this group was managed separately – by each platform; now, given the common theme of maturity, they have been reorganized under one department and report to one head, clearly to cut redundancies, costs and wring out productivity. I think it’s a much-needed and important move.

c) Tinder – There are four main focus areas to rejuvenate Tinder.

• Rebuild A La Carte revenues by reacting faster to user behavior.
• Optimize or increase revenues by adding boosts.
• Add short-term subscription packages.
• Start getting advertising revenues.

Clearly, with the brand being more than ten years old, the focus has shifted to more revenue per payer or user and to try to enrich the user’s experience even if the user is on the platform only for casual dating. Match does plan key marketing initiatives to broaden that usage by promoting Tinder as more than just a casual platform.

d) Asia – Asia has been brought under one head, Malgosia Green, the erstwhile head of Plenty of Fish, reporting directly to the CEO. Asia earlier was not clearly defined as a segment, and it is a smart move to elevate it and give it the strategic importance it needs as the next-fastest growing segment.

The focus areas would be the acquired brands, Hyperconnect, and Pairs. Besides these two, as I had mentioned in my previous write-up on Match, India has the potential to be the next huge growth market; it has a much younger demographic and a deep Internet penetration, which bodes well for Match. India has a median age of only 29, compared to 39 for the U.S. and 38 for China.

e) Innovation and Product Differentiation

Bringing in Will Wu from Snap Inc. (SNAP) to reinforce product innovation was also a great decision. In the past decade, success in the dating app industry has centered around new products – Tinder, Bumble, and Hinge are the best examples. All three created new genres or segments Tinder – Casual, Bumble – Ladies First, Hinge – Relationships Only (Designed to be Deleted).

Unless you robustly expand your pipeline and/or constantly experiment building a shiny new toy, there is precious little you can do to grow mature and tired brands with little or no differentiation. Additionally, you have to keep producing new features, such as audio and video presentations, which were novelties when first introduced in 2022 have now become customary, must-haves even for the evergreen brands. It is also a huge competitive advantage for Match that company-wide product innovations can be cheaply amortized over all suitable apps – This is a big competitive advantage for a behemoth like Match to efficiently roll out innovative features across different platforms – something smaller players will struggle to do.

Challenges

Oppenheimer cut its rating on Match last week due to slowing growth.

Helfstein lowered his opinion of Match (MTCH) to perform from outperform, and did away with his $65-a-share price target on the company’s stock. Earlier this week, Match (MTCH) said it expects revenue to be between $790M and $800M for the first quarter of this year. That outlook fell short of analysts’ estimates for $816M in revenue.

Helfstein said that while Match “unveiled an encouraging product roadmap” as well as signs of “improved a la carte revenue”, the company’s stock remains “a show me story”. Helfstein said Match (MTCH) suffered from a loss of about 500,000 paid subscribers, which added to signs that the online dating market in the United States and Europe is maturing.

Helfstein has valid points. Slowing growth in Tinder is a challenge since it has 56% of Match’s revenues. Given the decade-long growth, this is normal, and while management may squeeze out more revenues per user, I don’t believe Tinder can grow beyond the high single-digits. However, for the market leader and a giant in its niche of casual match-ups, where there are no real alternatives –an 8% growth (based on my estimates) over the next four years is not worth dumping.

Regarding the “show me story” – that’s fair, but then when the showing is over, the price would have likely gone up by 20%!. I don’t believe that Match is spinning its wheels with reorganization and product improvements. I think it is worth taking the leap.

Conclusion and Investment Case

As the famous adage goes, “The only two certainties in life are death and taxes.” I think you can add relationships to it. And if you want to invest in the relationship business, why not go with the 800-point gorilla.

The Online Dating Platform market is a duopoly with the market leader, Match controlling 65% of the most lucrative market, North America, with planned investments in an under-penetrated Asia.

They have taken a serious stab at addressing their shortcomings by reorganizing. While this will definitely take time to show results – it was overdue and it will lead to longer-lasting improvements.

Match’s sheer scale gives it a competitive advantage in spending and amortizing innovations across several platforms, which in turn should lead to better operating margins.

In spite of the expected tepid growth in 2023, I believe there is little downside in Match Group, Inc. at this price. Match bottomed out at $38 in Dec 2022, a drop of 79% from its Oct 2021 peak of $180. My 2026, estimated EPS of $4.3 is conservative, compared to Seeking Alpha’s consensus 2026 EPS of $4.5. At a P/E of 20, this translates to a Match Group, Inc. price of $86, or a 16% annualized return in the next four years from today’s price of $47.