Description

Bumble Inc. restructuring aims to boost operating leverage by reducing its headcount by 35% and enhancing subscription stickiness through feature upgrades. This move is expected to drive top-line growth alongside international expansion and improve bottom-line margins by 3% this year, thereby enhancing the Return on Invested Capital (ROIC).

Key Growth Drivers:

1. App Growth: Revamping Badoo and leveraging the potential of Fruitz.

2. International Expansion: Targeting untapped markets in Europe, Asia, and Latin America.

3. M&A: Enhancing user lifetime value and expanding the ecosystem.

Given the company's recent efforts, I expect EPS to be significantly higher in the coming years, offering a strong margin of safety at today's valuation.

Overview

Bumble comprises three core apps: Bumble, Badoo, and Fruitz, with the recent acquisition of Geneva adding a fourth. Operating in the dating industry, Bumble provides a platform and services to match people together and foster long-term relationships.

Currently, Bumble is primarily US-centric but is expanding into international markets for growth. The industry’s intellectual property is mostly held by Bumble and Match, with Match having a larger international presence. A key differentiator is Bumble’s focus on women, featuring options like the "first move," which helps maintain a more serious user base by reducing inappropriate behaviour.

Bumble Inc. has undertaken a significant restructuring aimed at relaunching its app to optimise for higher, stickier subscriptions and streamline operations by reducing headcount by 35%. These measures are expected to drive operating leverage starting in Q3 2024, focusing on top-line growth and improving bottom-line margins by 3% this year. This improvement stems from a leaner workforce and moderated marketing expenditures, setting the stage for higher returns on invested capital (ROIC) in the coming years.

Below is a chart forecasting ROIC for the years ahead. Notably, during a recent investor call, Bumble's CEO mentioned a margin of safety to allow for any cost overruns or issues with the restructure, which fortunately hasn't been needed. Costs may actually be lower than forecasted, potentially resulting in higher earnings. The top tier which includes Goodwill (potentially useful for future tax write-offs), is trending positively. The bottom tier excludes goodwill within the invested capital segment, and presents a more attractive view of Bumble’s asset-light business model.

Leadership Transition

Five months ago, Bumble welcomed a new CEO, Lidiane Jones, who brings a fresh perspective and strategic direction to the company. With her background in the lightweight technology sector, I see her slotting in as a good fit.

Jones joined Salesforce in 2019, where she rapidly ascended to the role of Executive Vice President and General Manager of Digital Experiences. She played a crucial role in developing and managing Salesforce’s key product lines, including Genie which became one of the fastest growing organically built products in Saleforce’s history. 

In January 2023, Jones was appointed CEO of Slack Technologies. During her tenure, she focused on integrating Slack’s capabilities with Salesforce’s ecosystem. Her leadership led to significant growth in user engagement and satisfaction, reinforcing her ability to steer large-scale operations and drive substantial product improvements.

App Relaunch Focus

1. Enhanced Engagement for Women: Bumble continues to prioritise allowing women to make the first move, but now with an option to set a question for men to answer, making initial interactions more engaging. 

2. Streamlined Onboarding: Simplified steps encourage users to add more photos and improve their profiles, leading to higher engagement.

3. Safety Improvements: Ongoing investments to enhance safety and reduce scam accounts.

4. Subscription Tiers: Focus on improving subscription tiers, particularly Premium+, to offer greater differentiation and higher success rates with added features based on the price paid. While AI tools are not unique to Bumble, they can improve churn, LTV, and engagement on the app. The network effect is the barrier to entry.

Capital Allocation

Bumble's capital allocation strategy includes share repurchases and accretive M&A activities. A $450 million share repurchase authorisation is in place, with $208.7 million remaining. Management is confident in repurchasing shares at the current valuation.

Over the past two quarters, Bumble has removed roughly 10 million shares outstanding, driving EPS up by 8% over the same period. Buybacks at today's valuation are highly accretive for future shareholder gains.

If shares continue to trade in this general region, we should expect management to continue finding value in buybacks.

M&A Strategy

Acquisitions such as Geneva and Fruitz, though relatively modest in scale, should enhance Bumble's ecosystem by increasing user lifetime value and expanding international reach. These acquisitions target younger Gen Z users through community-focused features. While not highly accretive to topline today, over the coming years these should widen the funnel, channelling more users into Bumbles other platforms and products.

Lidiane Jones, CEO of Bumble, stated, “One of the factors we’ve heard from younger users is that they want to start with relationships through community first. We envision a more integrated set of experiences of community funnelling into dating and vice versa.”

On May 20th 2024, Bumble announced the acquisition of Geneva to expand the Bumble For Friends experience to include group and community connections. This move targets the Gen Z demographic, who prefer forming connections through groups rather than individually. (Financial specifics were not disclosed; however, the lack of an 8-K filing suggests that the transaction is immaterial)

Two years ago, Bumble acquired the French dating app Fruitz for $10 million to gain international footing and attract Gen Z users. This acquisition has only recently started driving new subscription growth.

Balance Sheet & Ability to Execute

Bumble's outstanding carrying value of debt is $619.9 million, maturing in Q1 2027, with 55% of it hedged via interest rate swaps at 3.18%. The company currently has $262 million in cash and expects to generate roughly $840 million in cash flows by 2027.

Net debt of $357.9 million is well-covered by cash flows, alongside the $208 million in buybacks, leaving a $300 million cushion to cover the undisclosed purchase price of Geneva.

Growth Drivers

1. App Growth:

   • Badoo: Primarily used by frontline workers, Badoo has a high user base but low conversion rates. Post-COVID macro conditions have been challenging, but numbers are stabilising with a trough from the table below illustrating an improving footing for the app. A renewed focus on revenue models and premium subscription tiers indicates potential for top-line growth and Badoo looks very well positioned as an opportunity rather than a headwind as has been the case prior to June 2022.

   • Fruitz: Founded in 2017, Fruitz is still very much a start up. It was acquired in 2022, and has slowly begun contributing to subscriptions, albeit at a very slow pace. Numbers of paying subscribers are accounted for within Badoo numbers below, but they are still very marginal and should lead to green shoots into the future.

2. International Expansion: Bumble’s international growth is still in its early stages, with significant opportunities in untapped markets. Key regions include Germany, France, Spain, Asia, and Latin America. The focus is currently on building an ecosystem rather than purely on paying users, with the network effect expected to drive revenue in the future.

Valuation

Valuation is straightforward: operating leverage from lower headcount and incremental top-line growth (40% aggregate growth into 2026) from international expansion, converting Badoo's user base to paying subscribers, reducing churn with added features, and accretive M&A should all lead to margin expansion in the years ahead. A 3% margin improvement is expected in 2024, compounding in 2025 as restructuring costs ($20 million) are non-recurring. This is already underway, with a $33 million profit in Q1 2024 versus a $2.33 million loss the prior year.

In tandem with operating leverage, the company has bought back a significant number of shares, increasing EPS by 8% over the past two quarters. There is currently $208 million remaining on the share repurchase authorisation, which accounts for roughly 14% of total outstanding shares at today’s share price, slightly offset by roughly 2% approved but not vested SBC.

A combination of continued outstanding share count reduction, margin expansion, and top-line growth gives the company a strong chance of reaching $2 EPS over the next three years into late 2026.

For Bumble to double over this period, the market would need to value the company at 11x those earnings, which I believe to be a reasonable expectation with the possibility of outperforming.

Catalyst

- Buybacks

- App relaunch success

- EPS growth