Introduction and Context for Investment Rationale
Match Group (MTCH) operates a collection of well-known online dating brands and recently issued shares to the public in November 2015. Since then, the company has attracted proponents on the back of strong growth in its Tinder brand, while also attracting equally-enthused detractors who are betting against the stock. I own a small position in the company, and I’ll lay out my rationale.
For context, it’s important for readers to understand that, while I like the company, I view Match as one of my riskiest investments and have sized my position for what will be minimal exposure relative to my higher-conviction stock picks. Although Match Group doesn’t occupy my Prime Portfolio, I’ll structure the analysis in the same way, as that format fits the company’s story quite well.
What you’re likely to find is that MTCH stock is a lot like love: it arouses feelings of excitement and joy in some, while evoking fear and anxiety in others. Let’s explore these exciting and anxious feelings together as we learn about the business and the investment case for Match Group.
Is Match Group’s Business Simple and Understandable?
Match Group operates a collection of 45 online dating sites in 42 languages and 190 countries. Its most successful brands include some of the industry’s most well-known services such as Match.com, Tinder, PlentyOfFish, OKCupid, and Meetic (Europe).
Online dating is a service similar to those offered by matchmakers but conducted online and is a process that is self-managed by users and conducted on platforms such as those offered by Match Group. This method of dating has gained significant adoption because it permits a larger dating pool, ability to screen potential matches for specific characteristics, simplicity in finding a date, and a high level of convenience and efficiency not otherwise possible. Although there are some disappointing outcomes associated with online dating, many have flocked to these services for the reasons outlined.
Match Group's services generate revenues through subscription memberships, payments in exchange for a la carte special features, and paid advertisements. Pricing is affected by the specific platform used, duration of membership, desired features, and promotions.
The industry is fragmented and highly competitive with key factors of competition being brand recognition, size of a site’s user base, search and filtering features, word of mouth advertising, product features, ease of use, and past successes on a platform. As we will see, Match Group competes favorably across these metrics and, although barriers to entry are low, there are reasons why it’s very difficult for new entrants to compete effectively against the established networks.
Let’s take a look at how the company measures up along these key factors and examine some of the economic characteristics of its business and the broader industry.
Is Match Group’s Business A Franchise?
A franchise business is one that’s needed or desired, and that has no close substitute. The industry dynamics which we’ll examine prevent Match Group from being a true franchise business, in my opinion, but I think there are some key factors that support the view that Match has a strong competitive position with potential to grow over time. I’ll offer three characteristics to support this claim: (1) dominance in online dating, (2) operating leverage and potential for pricing power, and (3) Tinder mindshare. Let’s examine each one in sequence.
Dominance in Online Dating
Market share is a key consideration in determining whether a franchise business exists, and Match Group ranks favorably. A Seeking Alpha article by Quinn Foley estimates Match’s market share to be 25.7%, with rival eHarmony coming in at 12%. The remaining 62% of the market is split between competitors such as Spark Networks (LOV), Zoosk, Badoo, and others. A Motley Fool article tabs Match’s share at 25% and eHarmony’s at 12%, with no other competitor reaching as high as 5%. Morningstar (MORN) cites IBISWorld in placing Match’s market share at 22%.
Although its market size is substantially smaller, Match Group is to online dating almost what Facebook (FB) is to social media. Similar to Facebook, which owns the top four most downloaded non-gaming apps, Match offers four of the top five dating brands in North America, according to Morningstar. Tinder is the world’s number one downloaded dating app, and three of the top four online dating properties by unique site visitors are also under the Match Group umbrella, as shown in the image below (Match.com, PlentyOfFish, and OKCupid). In fact, Match commands 74% of total unique monthly visitors to the top six online dating websites.
The network size is by no means insignificant. Many sources cite the low technological, capital, and labor requirements to start an online dating site. These attributes mean that the industry has very low barriers to entry and established players must always consider the threat of incoming competition. However, once established, the top brands usually retain their position. That’s because, as a savvy quote in another Seeking Alpha article indicates, “customers flock to the best-known sites with the largest user bases, which forces less established firms to spend heavily on marketing to grow their membership.” And “even though users can easily switch to lesser-known products, they rarely do.” Customers simply stick with the services that offer the largest number of users, which makes it more likely that they can find someone quickly and efficiently. The network effect of Match Group’s portfolio keeps customers coming back again and again. And as customers return and as more adopt the service, the business leverages its growing scale.
Operating Leverage and Pricing Power
As Morningstar points out, Match can spread fixed costs over its growing portfolio of dating brands to streamline its operations, make its business more scalable, and create operating leverage. A Motley Fool article echoes that sentiment by explaining that Match’s subscription model can lead to earnings growth in excess of revenue growth since many expenses aren’t variable based on the number of subscribers and the same infrastructure can generally support a growing user base.
Some will look at Match Group’s steadily declining average revenue per paying user (ARPPU) as an indication that customers are less willing to pay for its services. However, management noted in its Q1 2017 conference call that each of its top six brands had either flat or higher ARPPU in constant currency year over year, an indication of stable pricing. The declines are related to product mix shifts toward lower-cost Tinder services and toward international customers which also have lower average revenue per user.
In terms of pricing, it’s also interesting to note that the average cost of a paying member to use these sites is minuscule in comparison to the potential value received. Indeed, some commentators have noted that a multi-month subscription can cost less than just a single date. And while there’s some concern that consumers may balk at paying when a competitor’s dating service may be offered for free, it’s also worth noting that paying members are thought to have greater intention and seriousness than nonpaying members. A paid site also reduces the likelihood of fake profiles and fraud. As a result, savvy daters may be willing to pay up for higher quality online dating sites. And this is reflected in Match’s ability to successfully monetize a meaningful number of Tinder users, whose members formerly used the site for free, another possible indicator of pricing power.
In its research report on Match Group in its superb premium service, Morningstar offers the following:
"The Tinder brand. . .has become very popular where many use it as a verb for finding a date online."
This entrance of the word “Tinder” into the English lexicon is in some ways analogous to the use of the word “Google” when referring to searching online. I don’t want to overstate this, and Morningstar is careful to say that this use of “Tinder” is not a moat source, but the fact that some now use Tinder as a verb is an indicator of tremendous mindshare among consumers which, if it continues, could further solidify Match Group’s dominance in consumers’ minds.
Tinder is the world’s number one dating app and, as management noted on the Q1 earnings call earlier in the year, the number two app overall behind Netflix. And it quickly vaulted to become the highest-revenue app in the App Store after its recent roll out of Tinder Gold.
With a dominant competitive position, potential for growing pricing power and operating leverage, and growing consumer mindshare, Match Group has promising prospects for future business performance.
What Are Match Group’s Prospects 10 to 20 Years Into the Future?
When looking to the future, one particular quote is instructive:
"Match’s business, pairing up people looking for a romantic connection. . .is as timeless as any business around."
Indeed, unless dating, relationships, sex, marriage, and family ever lose their appeal, the business would seem to have solid prospects. Couple that with Match’s leading market share and successful history of monetizing its sites, and the company has potential for a promising future. For those looking to consumer behavior to predict the viability of a business years into the future, it’s comforting to know that consumer preferences won’t affect the underlying demand for services like Match Group’s.
Another Seeking Alpha article highlights a negative perception working against the industry that online dating is for people who aren’t “good enough” to find their own relationships. This is an interesting point and a bias against online dating does seem to persist. Looking at some basic profiles from Match Group’s more mature dating sites, one can see the resistance against online dating even among those who use it:
"I’m not into the bar scene quite as much as I used to be, so don’t get to meet as many new people."
"I guess I’m on Match because it’s hard to meet an eligible bachelor in another country like the one I just returned from."
"It’s so hard to meet people when you’re a professional in [insert city name]!"
"I’m new to this and not sure how I feel about it, but my friends insisted that I try the site out."
The sense of online dating stigma among maturing young adults is almost palpable on these sites, and many act as if they must rationalize their reason for being there in the first place. But what’s also striking about the above examples is the way those barriers are breaking down and people are testing the waters regardless. And Tinder’s prevalence among younger audiences could well lead to a more rapid breaking down of these online dating barriers.
Fast forward 5, 10, or 15 years and this may be a thing of the past, particularly given the up-and-coming generation growing up on Tinder. For these soon-to-be mature daters, a casual dating relationship begun on Tinder may not foster feelings of embarrassment when explaining to friends or family where they met their match (given what is generally a less-serious relationship than those found through other services). And that will train these individuals to become ever more desensitized to the stigma that the current mature dating generation feels as evidenced in the examples further above.
This dynamic has potential to fully eliminate this barrier and make online dating increasingly prevalent in the future. The new generation will be fully accustomed to the process, unlikely to sense any stigma or feel embarrassment, and perhaps even unable to remember an earlier time when things were actually different.
This dynamic is evident with the share of 18-to-24-year-olds using an online dating service tripling in just two years, from 2013 to 2015. Many of the 35+ demographics have also increased their usage by 25% to 100% in two short years. The chart below is from the Pew Research Center and outlines the changing attitudes towards online dating.
Source: Pew Research Center
The ubiquity of Tinder seems to be introducing dating apps and services to younger consumers and therefore may reduce or eliminate the stigma of online dating experienced by older generations, while leading online dating services to an inflection point of wider adoption. The effect will be to make online dating more mainstream and could help Match Group’s more mature dating sites by serving as a feeder from Tinder into other Match product offerings as users mature throughout their dating lifecycle.
The softening of attitudes towards online dating seems like it could become a continuing trend. In fact, one woman who I met through one of Match’s services told me that she prefers online dating, because she can get a sense of the character and values of another person before experiencing feelings of romantic attraction which can so easily cloud one’s judgment. These softer attitudes towards online dating combined with changes in marriage rates and age could create secular growth tailwinds for Match Group. Consider some of the following statistics:
- In 1960, 72% of adults over 18 were married; in 2016, only 50% are married.
- Of those who are unmarried, 42% aren’t committed to being married in the future.
- In 2016, the average age of first marriage was 29.5 for men and 27.4 for women, both record highs.
Increased adoption of online dating and simultaneous record lows of marriage rates mean that as singles remain unmarried longer they will remain in the dating pool longer, increasing demand for Match’s services. And Match’s offerings are periodic use services, whereby consumers will use the service for a period of time, take a break, and then return.
Match Group also has an opportunity for international growth, where paid member count increased 31% in Q2 2017. The firm is investing heavily to grow its membership in Brazil, India, Turkey, and various other countries among the 190 where it does business. In India in particular, the company is partnering with local celebrities to reach young singles and introducing marketing campaigns that are appropriate and appealing with respect to local customs.
Another growth avenue comes in the form of advertising. Tinder now inserts ads which are similar in form to its users’ profiles. These ads, which appear every 20 to 30 swipes, should allow Tinder to begin to monetize the ~96% of its user base that are not yet paying subscribers. Although the incremental revenue is minimal, the incremental costs are also minimal meaning that such marginal revenue will act like a royalty, increasing earnings growth in greater proportion than revenue growth.
And paid member count continues to grow for Tinder’s traditional services. Tinder Gold was introduced recently and quickly led to Tinder becoming the top-grossing app. One analyst predicts the feature will bring in $150 million of additional revenue in 2018.
With societal resistance to online dating breaking down, long-term trends of singles remaining unmarried longer, advertising opportunities, and continued monetization of Tinder, Match Group has solid prospects for growth long into the future. But wary prospective investors should also consider the associated risks of an investment.
Risk Factors and Portfolio Allocation
Most commentators who cover the stock correctly point out that barriers to entry in the online dating industry are very low. This is due to the low capital, technological, and labor required for entering the industry. And since intellectual property isn’t protected for most key features, competitors and new entrants can adopt functionality originally introduced elsewhere. To further emphasize this risk, some point to Tinder’s rapid rise from startup to its current level of popularity as an example of the low entry barriers and disruption risk in the industry.
However, a couple of things offset these risks. First, Tinder’s rise coincided with rising popularity of smartphone dating apps and was simultaneously introduced to a market niche underserved by traditional matchmaking services—casual relationships for younger daters. One can glance at the Pew Research Center graphic further above that shows 18-to-24-year-olds’ use of dating apps growing from 10% in 2013 to 27% in 2015 as evidence of this. It’s unlikely that a similar service could rise as quickly without identifying an underserved market niche, in which case that new service may not significantly impact pieces of the market that are already served so well by Match’s services.
Second, although entry barriers are low, we already established earlier that consumers are attracted to services with the largest user bases, and the value of the service grows as the network grows. And unlike Match Group, many competitors do not have a sufficiently large network effect. This would be particularly difficult for a new market entrant to achieve. This is evident from the fact that out of the 8,000 online dating sites and apps started each year, only 1% are successful according to an industry publication. So, while entering the industry is easy, gaining any traction can be a massive undertaking for upstarts. And to further combat this risk, Match Group launched Swipe Ventures in 2016 to develop new products to retain Match’s leadership position. The venture is led by Sean Rad, former CEO and founder of Tinder.
A more concerning risk for shareholders has been Match Group’s massive shareholder dilution. For instance, even as net income grew 42.5% in 2016, earnings per share declined 2.4% due to 45.8% shareholder dilution. The change in diluted share count from year-end 2015 until Q2 2017 has been unsettling:
It’s a proven fact that share diluters underperform the market by a wide margin. Fortunately, as part of its Tinder equity plan settlement completed in Q3 2017, Tinder equity awards held by executives and employees have been fully converted to Match Group options, meaning that changes in diluted shares outstanding will no longer be affected by these Tinder awards as in the past but will be connected to changes in the market value of Match Group’s stock price and the conversion assumptions of stock options and other stock awards.
Still, I’ll be watching closely to see how shareholder-oriented Match Group’s management proves to be over time. Interestingly, there is also 44% short interest in the stock, indicating that the market’s most sophisticated investors are betting against it. With everything I’ve outlined, it’s easy to fall in love with the future prospects of Match Group’s business. But shareholder dilution, high short interest, lack of a true business franchise, and standard business risks make this one of the highest-risk investments in my portfolio, and one to which I’ve intentionally decided to allocate less capital.
Disclosure: Jason Rowland owns shares of MTCH and all stocks in both The Prime Portfolio and The Action Portfolio.
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