Description

Grindr – 10.2.2023

Grindr is the dominant dating app for gay men.  No other competitor – Scruff, Hornet, Match’s newly launched Archer, etc. – comes close, with Scruff as the largest competitor being 1/5 of Grindr’s size in the US.  This is a battle-tested moat, as numerous competitors have attempted to come after Grindr since it was founded in 2009, each with different theories for what Grindr is missing and how it would fix it to become a better app, and none have been successful.  Despite its flaws (too hookup-oriented, limited functionality outside of messaging, etc.), Grindr has clearly hit upon product-market fit, and its clear value provided and network effects are very hard to displace.

On Grindr, there’s no swiping or matching; users can immediately see all other users, sorted by distance to them (down to the exact number of ft away), and can message directly.  Users that are currently on the app or were on it within the last 10 minutes are marked with a green dot.  You can get a sense of the high level of activity just by opening the app and seeing all the green dots.  Grindr has 13 mm MAU, and the average user spends 55 minutes per day on the app vs. ~10-20 minutes for other dating apps.  Users on Grindr send 300 million messages per day.  Travel is a big use case, with Grindr users using the app heavily when they travel.  Despite an extremely simple app interface and hitherto clumsy efforts at monetization (which will be discussed below), Grindr already generates (2023E) $250 million in revenue and $102 million in Adj. EBITDA, a 41% margin.  Grindr has extremely high brand awareness amongst the gay population and historically has needed to spend very little on marketing (1-3% of revenue in advertising), which contributes to the high EBITDA margin.

Grindr has a long history of changing ownership and associated under-investment/mismanagement.  In 2016, Grindr was sold to a Chinese company, which former employees indicate mostly ran the company for cash, especially after it became clear in 2019 that it would be forced by CFIUS to divest its ownership.  Management strategy was mostly focused on cost cutting instead of investing in the app.

In March 2020, Grindr was sold to San Vincente Acquisition, a consortium of owners that included James Lu (a former executive at Baidu) and Raymond Zage (41% owner of the consortium), a former Asia-based executive at Farallon Capital who would later form the SPAC that took Grindr public.  In this stage, management improved, but management attention was mainly focused on fixing the problems that had accumulated, especially with respect to the technical infrastructure, a project that finished in late 2022 and that allows for new feature-building.  Management also added new, higher-tier subscription options that expanded monetization.  But the core features of the app were not substantially touched.

Grindr agreed to be taken public by Ramond Zage’s SPAC in May 2022, and the deal closed in November 2022.  (Raymon Zage owns 50% of the now-public Grindr, and our checks on him were very positive, with his Farallon colleagues speaking positively about him and his returns/track record at Farallon.)  Grindr hired a new CEO, George Arison, who started on October 19^th; and a new CFO, Vanna Krantz, who started on September 26^th.  George Arison was previously the founder of Shift, a Carvana competitor that raised $600 million and experienced high growth but ultimately failed due to over-rapid expansion and challenging unit economics in the sector.  Vanna Krantz was CFO of Disney Stream Services and helped launch Disney+ and ESPN+. 

George Arison, who is gay, seems passionate about the mission of the company and determined to improve it from its previous trend of product stagnation (though it has maintained high revenue growth throughout).  Part of the investment case is that George can add user features and additional monetization options to drive improvements in the product, though it is not strictly needed (Grindr trades at a reasonable multiple of current EBITDA – 14x 2023 and ~12x our estimate of 2024).

Grindr has a lot of room for improvement.  The app is extremely simple, and has just four tabs: Favorite profiles, Explore (the main interface for seeing profiles around you and on the map), Chat, and XTRA (a tab to upsell you on paid options).  Monetization is also very simple, with for a long time Grindr only offering two high-priced plans: XTRA ($19.99/month), which offers no ads, more profiles, advanced filters, “Chat in Explore” (chat with other users in a different geographic location ahead of making a trip there), and read receipts; and Unlimited ($39.99/month), which offers viewed me, incognito mode, unlimited profiles, chat translate, and other features.  In 2022, Grindr added Boost, its first consumable a la carte product, to boost user profiles to the top of others’ lists and jump the default ranking by distance.  Paying user penetration is low – only ~7% of MAUs are paying users, which compares to ~9% for Bumble and ~18% for Tinder.

Conversations with former employees suggest low-hanging fruit that could be added:

• More monetization options, to cover the gaps below, between, and above the $19.99 and $39.99 pricing, and to add more value into those subscription options (including by possibly removing some value from the free product);
• More a la carte/non-subscription products, such as those offered by Tinder/Hinge, with management already discussing some options around travel and super-likes/super-messages;
• More localized pricing for different markets, as the vast majority of revenues today (87%) are driven by US and Europe, despite substantial user bases in Asia Pacific, Latin America, and elsewhere;
• Increasing ad load (currently capped at 2/hour) and increasing the proportion of direct ads as opposed to 3^rd party ads (currently 2/3 of all ads today);
• More content in the app, such as more detailed user profiles or stories (in February this year, Grindr released video uploads);
• More features to allow more relationship-building for those users who want it as opposed to mostly hookups.

Given the prior mismanagement, the meaningful monetization levers left to pull, as well as some user growth especially in international (Grindr had 8% y/y growth in total MAUs in 2Q23), Grindr should experience substantial growth from here.  After 28% growth in 2023 to $250 million revenue, I project that Grindr should continue to grow revenues in the mid-teens through 2027, with more upside if these levers become more meaningful than I predict.  I assume that EBITDA margins improve to 45% in 2027 vs. guidance of 41% for 2023, which should be conservative as Grindr hit a peak margin of 52% in 2021. Assuming we exit at 12x NTM EBITDA in 2026 (a multiple similar to where Match trades today), that gets to an equity value of $10.77 per share, 87% upside or a 23% IRR.

Catalyst

Monetization levers lead to continued ARPU growth

User growth in international, though those come at lower ARPU