Description

Spark Networks (“LOV”), is a compelling long at current prices with 50-100% upside over the coming 6-12 months. After a healthy post summer pullback, and with some upcoming catalysts in 1H ‘21, the stock is well positioned for upside, thus we are recommending it for the second time this year.  

Our prior write-up, containing some useful background,  can be accessed here: 

https://www.valueinvestorsclub.com/idea/SPARK_NETWORKS_SE/6101916162

Company Description: 

Spark Networks SE is an online dating company. The Company is engaged in creating communities that help individuals form relationships with others. The Company’s brands include EliteSingles, JDate, Christian Mingle, eDarling, JSwipe and Attractive World. The Company also operates a number of other niche focused and international Websites and mobile applications. The Company’s segments include: Jewish Networks, which consists of JDate, JDate.co.uk, JDate.fr, JDate.co.il, Cupid.co.il, and JSwipe; Christian Networks, which consists of ChristianMingle, CrossPaths, ChristianMingle.co.uk, ChristianMingle.com.au, Believe.com, ChristianCards.net, DailyBibleVerse.com and Faith.com, and Other Networks, which consists of Spark.com and related other general market Websites as well as other properties which are primarily composed of sites targeted towards various religious, ethnic, geographic and special interest groups.

We believe Spark remains undervalued both on an absolute and relative basis. The company, trades at a mid-teens (16.2%) FCF yield to the equity on our 2020 estimate and a mid-teens (15.3%) FCF yield to the enterprise based on our 2021 estimate. The stock is also embarrassingly cheap on a relative basis, trading at .5x LTM sales when Match trades at 18x LTM sales and MEET was recently taken out at 2.5x trailing sales. Similarly it trades at 5.7x on trailing EBITDA, compared to Match and MEET at 54x and 12x respectively. On a per sub basis Match is $4,000/sub or 20x the $200/sub valuation of Spark. 

In fairness, the comps both enjoy growth, while Match is also a much larger company ($43B vs. Spark’s paltry micro cap, low/no growth status) supporting the argument for higher multiples for the comps. However, Spark’s brands are well differentiated (religious, older singles), and given the subscription nature of the business, it effectively enjoys recurring revenue. Even with relatively high churn rates and the need to keep spending on marketing the company is extremely undervalued and likely to re-rate in 2021 and catalysts play out. 

Why do we have this opportunity? 

This opportunity exists because Spark is in the midst of a transformation which is somewhat obfuscated due a few factors. Firstly, the company used high cost debt (L+800) to acquire a company (ZOOSK) that was meant to 2x revenue and 4x EBITDA. With little analyst coverage and with Spark filing in Europe every six months, and with virtually no IR to speak of, few have been paying attention and results are badly lagged. At the same time, early investors (Rocket Internet) in the parent company exited much of their position at a time when ZOOSK VC holders needed an exit due to fund maturities, leading to an exodus of institutional investors at the worst time. Add in a new management team, poor investor communications, poor disclosures, and a micro cap name that is cheap but with little organic growth and you’ve got an orphaned equity.

Why now?

Most of the company’s warts will be removed over the next 6 months. The company is poised to become a US quarterly filer in Q1 2021. In 2H 2020 management has been ramping their IR efforts and have greatly improved investor communication. In 1H 2021 we expect a debt re-fi at more reasonable rates enabling the company to ramp FCF and accelerate debt repayment. And during Q1 2021 we expect Bumble to IPO, bringing attention and interest to the space and another comp that will surely highlight Spark’s cheap valuation. Ultimately, we expect the stock to either re-rate (most likely) or get taken out by a strategic or financial player. Given the disparity of valuations any competitor that buys Spark will enjoy an immediate valuation uplift on the deal.        

The online dating space for many years has consisted of larger companies rolling up smaller competitors. Match.com, owner of Tinder, and the major player in the space is a roll-up, as is Spark Networks. That’s not to say Match would be the buyer but highlights that almost all the players are a version of roll-ups given how immediately accretive deals are in the space. 

As described in our previous report, Spark most recently purchased ZOOSK and is in the process of consolidating that acquisition, delivering, and generating cost synergies from the deal. Spark is now in the process of combining the brands onto one technology platform and has moved all of ZOOSK’s staff out of its high cost San Francisco offices, consolidating the team primarily in Germany. Total synergies are estimated at $15mm. 

M&A has continued in the space with MEET Group, most recently taken out in September by a company now called ParshipMeet Group. If Spark doesn’t re-rate it likely gets taken out.  

Balance Sheet / Model:

** assumes debt refinanced in early 2021

Summary

Spark is at the tail end of a positive transformation that will become much more apparent in 1H 2021. The company has a differentiated service, requires little capital investment, enjoys recurring revenue, but has a valuation akin to a cyclical commodity producer. We expect the stock to appreciate 50 - 100% in the coming 6-12 months as it either re-rates or gets taken out.   

Risks

Brands could stagnate or decline 

Company could struggle to refinance their debt at a lower coupon

New competitors could take market share

Multiple waves of COVID could discourage users from online dating 

Investors could ignore the company due to its micro cap / value makeup

Catalyst

Debt Refinancing 1H 2021

Reengaging in the IR process with investors 

Moving to quarterly from bi-annual financial reporting Q1 2021

Deleveraging

Takeout

Deal Synergies

More effective ad spend