Online dating as an industry has seen a huge growth spurt in the past decade years. The number of user registrations on online dating platforms today is higher than ever before with the growth being driven primarily through mobile applications. Today, we see a wide variety of dating applications catering to different themes and having varied value propositions.
Match Group (MTCH, Financial) is a market leader within this space with a vast portfolio that includes nearly 50 brands. Some of its top brands are Match.com, Tinder, PlentyOfFish, Hinge, OkCupid, Meetic and OurTime. The company has had a solid growth trajectory with increasing paid users during the pandemic, resulting in robust free cash flow margins. As a result, its stock price has zoomed to the skies.
The company has a number of interesting growth drivers, particularly its recent acquisition of Hyperconnect. Let's take a look at Match's growth drivers in detail to figure out if it is still a buy at current levels.
Robust business model
Match Group is benefitting heavily from the increasing popularity of online dating, which was accelerated even further by the Covid-19 pandemic. People are thronging to online dating apps to find love in this digital age, resulting in a huge surge in relationships being initiated online.
Though market penetration has not extended to all demographic parts of society and all age groups, it is evident that online dating is here to stay. Match Group is uniquely positioned with a broad portfolio of offerings to cater to this market, and the most popular and familiar brand from its stable is Tinder. The users can find potential matches on Tinder, while Match Group earns revenue through the subscription model. As a result, Tinder's contribution to the total revenue of Match Group is over 50%.
In addition to Tinder's broader offering, Match Group also serves specific demographic groups like Latinos, Christians, the elderly and others through its niche-focused services.
The company has been leveraging its knowledge from existing platforms to widen its portfolio with an intent to maximize monetization. Hinge is an excellent example of this. It has a concept similar to Tinder, but matching on Hinge is done based on a questionnaire answering and commonality between a person's social circle. As a result, it does not offer an endless stream of potential matches like Tinder, which is infamous for frequent swiping. Hinge has gone on to become the third most downloaded online dating app.
The Hyperconnect acquisition
While its core focus has been dating, Match is also making a shift towards social discovery in order to cater to a larger addressable market.
The company’s $1.7 billion acquisition of South Korean application Hyperconnect is for this exact reason. Hyperconnect is famous for its two social discovery apps, Azar and Hakuna Live. Azar is an app that offers one-on-one live video and voice chat, and Hakuna Live caters to small and large groups with a product that emphasizes avatars, games, quizzes, and so on.
Azar has a strong presence in Asia, and its presence is growing in Europe. The management believes that Azar and Hakuna Live can be expanded well by leveraging Match Group's existing reach and capabilities.
Hyperconnect works on an "a la carte" revenue model, which is an interesting addition to Match Group’s subscription products. Some may find it surprising to see that the revenue per paying user for Hyperconnect is more than twice as high as that of Match Group's offerings. The revenue from Hyperconnect's two apps is around $35 per paying user, whereas revenue from Match Group's offering is about $15.46 per paying user.
Hyperconnect also has a strong knowledge base of the Asian market along with excellent artificial intelligence capabilities that could help Match Group go beyond the market for singles and also increase geographical exposure to existing brands.
Improving margin profile
Match Group monetizes by charging users for upgraded features or subscription products for dating apps. However, given that these dating apps are primarily accessed through mobile devices, and all subscription payments are made only through mobile devices, Match Group has to pay 30% of revenue to Apple (AAPL, Financial) and Google (GOOGL, Financial). These companies require app developers to use their payment systems for all in-app purchases.
However, the situation could change after a California judge ruled that Apple cannot legally block app developers from avoiding its payment toll. This ruling could help Match Group and other companies avoid the 30% revenue sharing, assuming it can convince its customers to bypass the app store tolls. This was one of the key factors driving the recent runup of Match Group’s stock price. Despite the high app store revenue share, Match Group has always had a strong profit margin. The company's operating margin is typically around 30%, which could go as high as 60% if it is able to avoid giving so much of its revenue to smartphone operators. While it is unlikely that the company will be able to entice all its customers to leave the app store payment structure, there is definite scope for margin expansion.
Final thoughts
Match Group’s stock has performed well over the past year and the company is expected to grow its top-line by around 20% for the current year. Its quarterly results are showing an improvement in revenues per paying user and subscriptions across most of its platforms.
The company’s stock is currently trading at an enterprise-value-to-revenue multiple of 17.85 and a price-earnings ratio as high as 80.49 given its market leadership position in the fast-growing online dating business. The high valuation multiples and competition from fast-growing players like Bumble (BMBL, Financial) could make Match Group a risky bet despite the strong growth drivers. I believe that the company’s stock deserves a "Hold" rating at current levels and investors should wait for better timing.
