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Sunday Finds + Thoughts on Match Group
Interview with the CEO of $RICK this week!
Welcome to Chit Chat Money’s Sunday Finds + One Thought From Last Week newsletter. In this newsletter you will find a topic I wanted to write about from last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
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Thoughts on Match Group’s Q3 Earnings
Match Group reported Q3 earnings this week. Spoiler alert: investors continue to hate the stock.
The drawdown has been brutal, with shares now off 83% from all-time highs:
The forward P/E is now down to 10.6:
Even though revenue was up 9% in the quarter, operating income grew 16%, and initial expectations are for around 10% growth in 2024 (foreign exchange rates depending), investors I talk with are very bearish on the name.
Why? It really all comes back to a decline in Tinder Payers. After raising prices by ~50% in North America (revenue per payer was up 42% in the United States in Q3) the absolute number of Tinder Payers has declined. Tinder payers declined 6% year-over-year to 10.4 million in Q3.
The concern is that Tinder is losing relevance to competitors like Bumble and Hinge (Hinge is owned by Match Group). Mr. Market is extrapolating the recent results and seems to believe that Tinder will continue to decline over the next few years.
I think these concerns are mostly unwarranted. Payers are not indicative of the activity on dating apps like Tinder. Only a small portion of the users subscribe to upgraded services. I frankly don’t care if 5 million people are paying $50 a month or if 50 million people are paying $5 a month. As long as revenue and activity (i.e. swipes and matches) are climbing higher, the ecosystem is healthy.
What I’m actually concerned about is the lack of disclosures around active users. Management has given some color around downloads at Tinder “improving” but does not give good data about MAUs or whatever metric you would like to measure activity. Clearly, they have this data and would show it if they thought it would look bullish.
I bought some shares of Match Group this week in my Roth IRA. Unfortunately, it was before earnings, but I still think it is a great risk/reward over the next five years. I love how much everyone hates the thought of buying shares right now. I will probably be buying more over the next six months.
Here are some different scenarios I am thinking of and the likelihood I assign to them.
1. Tinder Revenue Declines (i.e the bears are right)
If Tinder downloads and activity keeps going down globally, eventually it will see a decline in revenue, no matter how much management optimizes its monetization.
I think the likelihood of this occurring is low, but not irrelevant to investors. A few things come to mind here:
Management knows this and is working to improve the service. Previous management “ham sandwiched” the app and just let it grow virally over the last decade. It still looks relatively the same as it did 10 years ago. Now, they are working to add a lot of low-hanging fruit in the form of new features, monetization strategies, and a marketing campaign.
Even if there are clear market share losses to Bumble/Hinge in North America today, Tinder is a global brand. Internationally, it is on a much stronger footing and the only scaled global player. This gives it much more breathing room to fix its issues before Bumble/Hinge comes knocking in Europe, Latin America, and Asia.
And even if this does occur, growth at Hinge will almost assuredly take in some of that lost Tinder revenue growth. Do we really think that the dating app sector is going to stop growing? And will all the new dating app revenue go to Bumble and Grindr (the only true competitors)? That seems unlikely to me.
In this scenario — which I think has a low likelihood — Match Group’s consolidated financials probably won’t grow much over the next five years. I think this is being priced in by investors right now. With the buyback program (discussed below) I think returns are at least flat in this scenario.
Of course, revenue could decline over the next few years. But with the proven pricing power of dating app subscriptions, I feel like this is very unlikely unless Tinder dies a quick death.
2. Tinder runs in place
This scenario is probably my base case. I do have concerns about Tinder, but I think they are likely fixable. However, this isn’t 2016 when they were the only true game in town and could fall asleep and hit 20% revenue growth with 50% margins. We don’t get back to 20% revenue growth in my view.
But there is still plenty of room to grow activity and raise prices. In more mature markets, only around half of eligible users (i.e. single people) use dating apps. Much fewer people use them in Asia, the Middle East, and Latin America. With extremely high incremental margins, Tinder can grow its profits even with very low-priced subscription services in these areas.
The population of these areas is set to grow over the next decade, and smartphone usage should only grow as well. There are multiple industry tailwinds that should propel the usage of dating apps even higher, at least globally.
I say all this to explain why I think Tinder has an easy path once it fixes the operational issues of the last five years. Even if it loses a bit of market share, it should still be able to grow revenue by 5% - 10% annually. If they average just 5% revenue growth over the next five years, the stock will likely crush the market. Most dating app users have 3 - 4 services in their arsenal, so to speak. This won’t be a winner-takes-all category.
These low expectations are what makes me optimistic about owning shares at these prices.
3. Tinder retains market share
If Tinder retains market share, watch out. Dating apps have phenomenal pricing power (something I may explore in another post), and I think Tinder can grow its prices by around 5% per year in perpetuity. As long as it retains its user market share, of course.
With hundreds of millions of potential users still yet to try dating apps, I think if Tinder regains its footing and grows its nominal users along with Bumble and Hinge (i.e. retaining market share) it has a path to growing revenue by 15% per year for the next five years.
Is this a likely scenario? I don’t think so. But I think it is more likely than waking up in five years and seeing Tinder has reached obsolescence.
Add all three scenarios together and you have:
A low likelihood of flat/below hurdle-rate returns over the next five years. Smaller chance of negative returns.
Most likely get 15%+ IRR due to ~10% overall revenue growth + multiple re-rating + buyback (margins may expand too, a bit of a wildcard)
A low likelihood of 15% - 20% consolidated revenue growth, which would likely come with a lot of margin expansion. In this scenario, the stock would do much better than a 15% IRR.
I’m sure a lot of you disagree with some of my thoughts here. But this is why I find Match Group stock highly attractive at these prices. The risk/reward just makes a lot of sense to me. And, it’s a business I can easily understand.
To close things out, I would remind readers that Hinge is on pace to do $400 million in revenue this year, should get to $1 billion in revenue within a few years time, and is currently growing revenue 44% year-over-year. Even if Tinder’s revenue declines by $500 million over the next three years, Hinge should be able to pick up the slack.
And they are actually starting to return capital to shareholders. Match bought back $300 million in shares in Q3 and should have the capacity to do around $750 million - $1 billion in buybacks annually. It currently has a market cap of $8 billion. Do the math yourself on that one (SBC will be a slight headwind). The management question is becoming much more clearer over the past year, in a positive way.
Obviously, do your own research. If I talk optimistically about a stock, I may own it and want it to go up. This is the case with Match Group.
Here’s our podcast on Match Group from earlier this year:
See you next week,
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3 Intriguing Reads
The Creator Economy Isn’t Dead - Young Money
And even the creators who are making money tend to run low-cost businesses with few variable costs. As someone who makes a living online, my total expenses are $10 per month for a domain, $99 per month for my beehiiv account, $8 per month for my X Premium subscription, and a one-time $1,200 expense for my MacBook.
Restoration Hardware’s Growth Inflection - Recurve Capital
At an average repurchase price of $295, we believe Gary was happy allocating capital at a mid-single digit multiple of future earnings "in the next couple of years." With RH's Design Gallery construction pipeline in process and the contribution from product refreshes on same-store sales, we believe RH is poised to accelerate its revenue and earnings growth over the medium-term. Despite the recent volatility in the stock, the company is pursuing many different growth strategies (international expansion, US gallery growth, hospitality tangents, and product refreshes), all of which should contribute to growing the brand meaningfully over time.