Description

Match Group, Inc. (NASDAQ:MTCH) owns/operates ~15 online dating services that total over 100mm MAUs worldwide. MTCH generates an incredible amount of consumer surplus for its users and I believe that its ability to capture more of it, along with MTCH continuing to lead and benefit from online dating’s (“OLD”) growth generally, will drive top line growth in the twenties or high teens for years to come. At $8bn in year 5 revenue (~20% CAGR) with high-40’s EBITDA margins at maturity and a 25x EBITDA multiple, the stock returns 18% per year from today’s levels.

MTCH was written up on VIC prior to COVID – I encourage you to read that for background here. I will try to focus this write-up on points where I have different ideas or different levels of conviction. A lot has happened since February 2020.

BACKGROUND

Match helped invent OLD with its eponymous website launched in 1995. Barry Diller’s media/Internet holding company IAC (“Ticketmaster Online-Citysearch” at the time) acquired Match.com in 1999, and 20+ dating app acquisitions/launches later, Match Group was listed in 2015 and fully separated from IAC in Q2 2020. Diller remains a large shareholder.

Pre-Tinder, OLD was mainly desktop-only and much more niche-y. Users were typically older, more intentional with their usage (a nice way of saying prioritizing relationships over hookups), and pursued a quality over quantity approach to make connections. This was great for paid conversions but seriously handicapped TAM.

Tinder was founded in 2012 with support from a MTCH incubator (MTCH would later fully acquire Tinder from its founders at prices that are the subject of an ongoing lawsuit) and pioneered a mobile-first OLD experience that resonated with a much wider set of users. The Tinder experience is centered around “swiping” on profiles – swiping right indicates you like someone, left means you pass. This game-like construct + reducing the requisite personal info to get a profile up and running helped Tinder make OLD much more accessible to the masses, propelling its viral growth (without much advertising).

Today, Tinder is MTCH’s biggest revenue contributor (56% of total in Q2 2021), growing revenue 26% vs. 2020 and 45% vs. 2019. Estimated total MAUs are 80mm with <10mm paying users in any given month, but MTCH does not report MAU totals seemingly in an effort to stay under regulatory radars. Tinder is the #1 dating app worldwide and the highest grossing non-gaming app on both major app stores.

MTCH’s non-Tinder brands include some gems such as the #3 U.S. dating app Hinge, which perhaps should be reported separately as it’s growing revenue triple digits % to ~$175-200mm in 2021E, along with the original Match.com, OkCupid, PlentyOfFish, and many more. OLD is a regional game in that dating cultures, OLD adoption and stigma, and apps of choice vary significantly country to country. MTCH typically represents two of the top three apps in each country.

MTCH is the heavyweight in OLD with north of 60% of total revenue. Dating apps of significance not owned by MTCH include Badoo and Bumble (both owned by NASDAQ:BMBL) and Grindr (owned by a private investment fund).

MTCH generates the vast majority of its revenue today from subscriptions, which enable power users to get more out of the apps, whether that be via allowing them to send out unlimited likes, see who likes them so that they can match more quickly, or – and they would never admit this on record – showing users higher quality profiles more frequently.(fn1) Additionally, MTCH sells a la carte digital consumables such as “Super Likes” on Tinder and “Roses” on Hinge, which are likes that show up at the top of the recipient’s notifications and purport to have a higher success rate. Interestingly, MTCH does not sell many ads.

For a sense of MTCH’s scale, the company expects to generate $3bn of revenue this year and $1bn of pre-SBC EBITDA. As mentioned, MAUs are not reported but are certainly over 100mm (perhaps in the 125mm ballpark), unique users who pay on MTCH apps any given month are around 15mm, and said payers spend around $15-16 per month.

COVID

OLD was on a tear well before COVID, quickly becoming the source of >50% of new relationships. This is a classic digital disruption story – OLD gives singles 100x+ the options they would have had if restricted to meeting people through social circles / at bars and events. OLD leverages Internet scale/network effects and a ridiculous amount of preference data to make matchmaking more efficient and convenient vs. analog alternatives. These relationships “work” too: studies show that the relationships that spawn from OLD are just as healthy/long-lasting as relationships that began offline.(fn2)

That’s not to say it’s pure bliss: imbalanced gender ratios (most heterosexual-focused apps are ~60-69% male), poor experiences for some females (harassment, etc.), addictive app design, poor support for certain minority communities, and plenty of non-responsive and fake users hinder the OLD experience. But some of these are solvable, and notwithstanding the drawbacks, the OLD experience is better than that of analog dating overall. Evidence of that is below (this data would be even more striking if continued through today).

I believe COVID accelerated adoption and societal acceptance of OLD in ways that will be difficult to quantify or even comprehend for years to come. OLD was likely the source of >90% of new connections during points in 2020 given the complete drying out of alternatives. The user growth numbers speak for themselves, and importantly, some demos (such as affluent, urban millennials - Hinge’s sweet spot) embraced OLD to a much greater degree during this period.

OLD is weird in that success – which for some users might mean committing to a relationship – should necessitate churn off of the apps. This is one of the key reasons why investors might doubt the durability of MTCH’s growth/earnings. There’s merit here, but even if many of the new COVID users end up churning, the second-order+ effects of the COVID usage spike – OLD and current leading apps in particular gaining greater cultural mindshare and acceptance – are incredibly powerful and lasting.

Hearing about an OLD success story in one’s own social circle is worth 500 Facebook ads. All those new COVID couples and all the future weddings sparked by OLD supply incredible (free) marketing for the OLD category and will support adoption for years to come. When you frame the OLD business in terms of widespread social behaviors and norms instead of simply “ARPU * active users at any given time”, the category’s durability and continued growth potential shines.

On the latter: the term “network effects” has been polluted by overuse, but OLD certainly has strong increasing returns to scale, particularly at local levels. The 50,000th millennial user in Los Angeles will find Hinge to be much more useful than the 10,000th. COVID has helped get the flywheel spinning in many attractive demos/geos.

PATHS TO STRONGER MONETIZATION

MTCH is similar to Twitter in that it generates far more value for its users than it captures. Only ~10% of Tinder’s MAUs, for instance, spend money. ARPPU (that is, ARPU for paying users) is a mere ~$15 per month, which is laughably low compared to say, the cost of getting drinks at a bar, etc. Now spread that revenue amongst all paying/non-paying users and monthly ARPU is ~$1. Finding a great partner is a hugely important input to quality of life, and there certainly are millions more people who would part with good money if they were convinced that OLD subscriptions helped them in this endeavor.

From MTCH’s perspective, there’s a delicate balance between monetization and offering great free experiences, and management has correctly erred on the side of the latter in an effort to grow the mobile OLD category generally.

Taking things to an extreme, if the entire Tinder app was put behind a paywall tomorrow, the experience for all would plummet for obvious reasons. What if Tinder required a subscription to send out more than 1 like a day? That’s probably still a poor UX. Maybe 5 likes and see how users react? 10? These are some of the experiments Tinder and other MTCH brands are executing in real time as the company matures and pressure to grow revenue/EBITDA mounts, especially since Match Group is now completely independent. BMBL is working through the same transition.

MTCH is making progress in this regard and given their terrific test-beds with short feedback loops – MTCH apps can test new features/products hyper locally with little risk before rolling things out widely – I have little doubt they will match in-app spend with user willingness to pay without compromising the free user experience, on an app-by-app AND geo-by-geo basis…it’s a question of when, not if.

The possibilities are endless: can Hinge start hosting dating coaches in-app to give users tips on how to improve their profiles or chatting skills? Can Tinder & Hinge offer a joint high $ subscription? I think certain MTCH brands could employ an ad model extremely well too, particularly Tinder with its younger, perhaps low-WTP user base. Dating apps have a lot of user info – data that may be even more unique/personal vs. Instagram and Facebook – and a lot of highly engaged users. Why not require all free users to watch a targeted ad with no skips between swipes, Snapchat-style?

Speaking of Snap, MTCH has also been debuting community-style events in certain apps (e.g., Tinder “Swipe Night” which begun with a common video feed and then broke out into individual speed dating rounds over video), which have seen strong participation numbers. Ads here might make sense.

**Given ATT, it is an uncertain time to dive into mobile advertising, and although the CEO teased considering non-subscription monetization on the Q4 2020 call, the COO/CFO shut down the ads possibility for now on the Q2 2021 call. So maybe all of this is on pause for now. But it’s certainly a lever that can be flipped on rather quickly if revenue growth slows below management’s annual target of mid- to high-teens.

How MTCH accomplishes monetization is up to the management team, who will undoubtedly make better product decisions than I given their track record of developing/incubating/acquiring category-defining products. The more important pieces are believing in the potential here and believing in management’s intentions to improve conversion now. I do. The team knows that COVID pulled forward user growth and that they need to get those new users spending to create shareholder value given the lofty valuation.

HOW TO THINK ABOUT COMPETITION

In OLD, barriers to entry are low but barriers to scale are extremely high, especially today as the industry has matured and leaders can more effectively match-make with their unnerving amount of revealed preference data and big active dating pools. There’s a huge cold start problem that you need to overcome zip code by zip code to become an interesting, new service. I’m of the view that OLD is kind of where social networking was 5 years ago, in that there are established winners with moats in each core OLD use case, but these moats are more regional compared to those of social media.

The segmenting seems to be along the lines of (all oversimplified examples): intentional users in their late twenties/early thirties in major U.S. cities gravitate towards Hinge, that same use case may be better served by Bumble in European cities, college-aged casual daters use Tinder in many countries, >40 year-olds that are intentional may use match.com, etc. OLD users typically have 3-4 different apps, but many only actively use 1 or maybe 2, and only pay for 1 if they are paying at all.

The only way I can see a totally new entrant overtaking the leader in one of these broad segments is if they come in with an entirely new social mechanic. Otherwise, it will almost always make sense for the new online dater to use the incumbent apps. Maybe that new social mechanic is video only dating with no pic/text profiles at all, or one where users play an online game with matches to get to know them, or something. If I knew the answer I’d probably be on the phone with Greylock.

So I think the incumbents have pretty good positioning for reasons I won’t belabor. The best evidence of moat-yness is the flop that was Facebook Dating, which disproved the most obvious competitive threat to OLD incumbents. Facebook Dating is a unique case study and I suspect it slumped because of the incongruence between users’ social graphs and interest graphs. Put simply, many people prefer to separate church and state.

Given that I like the incumbents, why am I pitching MTCH instead of BMBL?

1. The global pie is big - ARPPU is largely the same across regions, and the single population is way bigger outside of the U.S. / Europe (75% of the global 600mm Internet-connected singles)

1. MTCH has the advantage of operating multiple brands and bigger, more global teams to chase after this opportunity

2. I’d rather pick the leader with a huge portfolio given:

1. Diversification benefits help protect against churn from one app to another

2. Data and experience advantages that benefit the entire portfolio

1. For instance, the testing results from monetization schemes mentioned above can be shared across apps. Same with safety features

2. Additionally, preference data – after all, matching compatible people is the key function of these apps – gets better with scale

3. If there is a new “next big thing” around the corner (discussed in the next section), I believe MTCH will be around to either invent it or acquire it early given their track record and DNA

1. There would be no Bumble without MTCH - BMBL’s CEO was an early Tinder employee, and MTCH successfully sued BMBL for patent infringement a couple years ago (settled privately)

4. I think Hinge is out-Bumbleing Bumble

1. Hinge is growing like a weed (40%+ MAUs over 2019) while Bumble’s MAU growth has slowed to teens vs. 2019

2. Hinge shot from >#10 to #3 dating app in the U.S. behind Tinder/Bumble and now is the #2 search result for “dating” in the App Store

3. Bumble is stuck trying to position itself as both an intentional and casual dating app as to not limit its TAM, which might make it seem suboptimal to users for both use cases over time (whereas MTCH can offer a different app for each use case)

That said, penetration of paying users relative to the 600mm TAM is so low at single-digits %, and I strongly believe both MTCH and BMBL can grow and grow profitably at the same time. Putting a $ TAM on this category is impossible since match-seeking was mainly a “free” (in terms of dollars, not time) endeavor until OLD came around, but it’s not hard for me to believe the ceiling is north of $50bn globally (vs. <$10bn revenues today) given the importance of these social functions in Maslow’s hierarchy.

INNOVATION IN THE CATEGORY

I think MTCH is an attractive 3-5 year investment (p.s., shorter time horizons on this one seem tough given the high 1-year forward valuation (what’s the difference between 27x next-year EBITDA or 35x?)). A lot can happen in the world over 5 years, particularly in the consumer Internet world, so it’s worth musing about what innovations might be coming in this category. Innovation might pose opportunities for the incumbents and new entrants alike.

I find it difficult to believe that the next big thing will involve slight variations on the core “profile with varying levels of video / pic / text prompts → swipe → match → message/phone/video call” mechanic. As mentioned in the competition section, the next gen in this category might more smoothly include video (incumbents do offer video, but often with low usage rates) and AR/VR (MTCH claims to be working on this as well, but there is a limit to what they can actually launch until the hardware reaches an inflection point).

Additionally, expanding dating apps into supporting friend-seekers is an exciting growth opportunity. Bumble offers this natively and Tinder launched an app called Aldo for this use case.

It’s hard to conclude anything definitively here but I think MTCH has a greater chance of creating the next big thing than any other company..

APP STORES

It would be remiss of me not to mention app store regulation given MTCH shells out hundreds of millions to the fine folks at Google and Apple yearly. I’d recommend reading Ben Thompson’s blog on this subject for those getting up to speed on Apple v. Epic.

His takeaway is that the Epic ruling favored Apple resoundingly, and Apple can walk away basically without changing any major practice – 30% take rate and all – if they wanted (public pressure matters, though). The judge put some pressure on Apple to allow non-Apple in-app payment options next to Apple in-app payments (i.e., the latter would include the 30% fee to Apple), so the consumers can decide how to transact.

It’s important to remember that consumers couldn’t care less about this whole situation. So maybe MTCH will ultimately offer a couple bucks cheaper subscriptions next to an option with the Apple logo that’s marked up higher, maybe some consumers take up the former and help gross margins trend away from the 70% level they are heading to (because of the 30% app store fee, offset by desktop-centric MTCH apps having higher GMs), who knows. MTCH stock, along with Zynga etc., sort of shrugged off the ruling because it did seem to be a nonevent. The positive thing about this situation is that the increased scrutiny means the distribution of outcomes is certainly skewed towards Google/App becoming more lenient/generous with their developers instead of less over time.

VALUATION

I’d imagine many of you would agree MTCH is a decent company but are (understandably) choosing to stay on the sidelines due to price. MTCH trades at a rich valuation at 47x 2021 EBITDA guidance and 33x 2022E. It joined the S&P 500 this month.

I think you can earn strong returns from current trading levels if you believe current top line growth rates will persist. To isolate the more controversial variables, here are the more straightforward assumptions I’m using:

• Mid-to-high 40s EBITDA margins at maturity

• They flirted with these levels before and this business has a ton of operating leverage, sans app store fees

• 2% annual share dilution for employees layered on top of current FDSO

• The value of the 2% compounded is >$10bn in the terminal year

• UFCF conversion in the 70’s to account for future tax requirements etc.

• Cash pays down debt then sits on balance sheet

• Exit forward EBITDA (2027E) multiple of 20-25x (vs. 33x today)

Now for revenue. I pencil to low-20’s revenue growth to just over $8bn in 2026 vs. $3bn in 2021. Breaking that +$5bn further, if you believe in 8% ARPPU growth (vs. double digits today) from more effectively getting high WTP users to, well, pay more ($23-24 per month in 2026 vs. $16 today), and the ad business growing ~30% p.a. to ~$250mm, then average monthly paying users need to grow 13% p.a. from 16mm to 28mm to hit my $8bn bogey. If I had to force rank how good I feel about those 3 pieces, it would be:

1. Paying users

1. The TAM is 600mm Internet-connected singles. MTCH is already at >100mm users sporting what’s probably a low-DD conversion rate, so MAU penetration alone approaching 50% (holding conversion constant) could clear 28mm payers

2. As the generation that grew up on Tinder matures and enters the 25-30 year old serious daters bucket, conversion should increase as well, setting aside anything else MTCH does to improve monetization

2. Ads

1. This is not a near-term focus, but at a flip of the switch Tinder could support a $1bn revenue ad business

2. $250mm across MTCH’s entire app portfolio against a $8bn revenue base seems miniscule and very doable

3. ARPPU

1. $16 a month is peanuts if what you’re paying for helps you find a lifelong partner. Same with $23-24

2. That said, I think it will be hard for MTCH to sell millions of $25 or $30 / month subscriptions considering the rest of consumer Internet subscriptions are much closer to $10 than $30 (excl. PTON of course)

3. So if that’s true, and maybe it isn’t, to achieve the high ARPPU number MTCH will need to sell a lot more consumables, and I’m skeptical there will be enough whales to buy a ton of these every month

These assumptions get to 18% returns over a 5-year period. This does not factor in MTCH’s capital allocation prowess (Barry Diller DNA, after all). Share buybacks, smart M&A, etc. would juice these numbers significantly. If the share count only expanded 1% p.a., for instance, returns bump up 200bps.

I also like MTCH because there are some potential right tail outcomes. If the exit multiple stays constant returns shoot up 700bps. If at exit, the company is still growing 20%, sentiment remains strong (fueled by people going on dates in the metaverse and paying MTCH for cool virtual clothing consumables) who’s to say we don’t have multiple parity. I’m not underwriting things like that, of course, but it’s certainly possible.

WHAT COULD GO WRONG

• Short-term multiple contraction

• The stock has more than doubled since the last VIC write-up and the multiple has expanded

• That multiple may contract and result in poor 12-18mo returns, so I would size the position accordingly to try to take advantage of that

• In a weird way, it kind of makes me bullish that my biggest concern is valuation

• Regulatory

• OLD has dodged most of the regulatory scrutiny that social media is constantly dealing with, but if that changes, the sector might re-rate permanently

• Management monetizing too aggressively makes app(s) unusable and drives down MAUs

• Again, the balancing act is delicate...you want users to feel like they are getting the cheat code to the app with a subscription but also make free users keep coming back

• New viral app for adult Gen Z - which seems to be using the Internet quite differently than millennials, e.g. TikTok - comes from a competitor

1. Per r/Tinder and r/hingeapp discussion threads so take with a grain of salt.

2. https://web.stanford.edu/~mrosenfe/Rosenfeld_et_al_Disintermediating_Friends.pdf

Catalyst

n/a