Bumble (NASDAQ:BMBL) is a major player in the growing online dating industry, with Bumble and Badoo apps being its major revenue drivers. The industry has seen a marked slowdown in the past year, with peer Match Group (MTCH) also struggling to win new paying customers to its freemium platforms. Revenue is driven by upselling a better online experience, but Bumble has a great platform aimed at women with a safer more protected environment for dating. While the stock has been a major laggard over the past 52 weeks, the signs of stabilization in the business are there with the valuation now interesting. Longer term growth is harder to pinpoint, but a short to medium term view has Bumble with a good opportunity at $15.75/share. The market is worried about revenue as a service like this is a possible cut as consumer budgets continue to be stretched by inflation. However, this all seems very baked into the shares at these levels and could be a great long term entry.
In-line Q2 – muted reaction
The market had a relatively muted reaction to the recent Q2 results from August 8th, with the stock ticking down a bit since. The results were relatively solid, with the results beating estimates and the company confirming no change to its 2023 guidance. Revenue was up 18.5% to $259.7 million with Bumble growing at a more impressive 23.4%. Badoo has been a drag on revenue growth for some time, but it has begun to stabilize at 2% growth y/y and will prevent further headwinds to growth rates. The biggest thing that will propel growth forward are increased user additions, in particular on the Bumble application. Badoo is growing very slowly, and fairly minor to the stock’s performance over the long term. Bumble is the growth engine of the stock, and well positioned among Generation Z/Millennial consumers. Paying users grew 28% over the prior year with a solid 139,000 users added in the quarter. Revenue per user hasn’t been increasing as the industry is facing some pressure on pricing between apps, like industry heavyweight Tinder. Consumers continue to fight inflation pressures and price increases on such a product aren’t viable in this environment. Bumble was actually profitable in Q2 with $12.1 million net income before taxes. The company has $381 million in cash as well, so no equity raise will be required with cash at such expensive levels. This is key because any further dilution would be very bearish and probably send additional institutional investors to the sidelines. However, the leverage in BMBL’s model isn’t yet providing a large lift in profitability as they continue to market heavily.
Innovation in paid offerings
Bumble is focused on innovation with features such as compliments and Bumble for Friends to increase engagement. Bumble is really trying to reduce pain points for women and increase fun interactions between people. Bumble for friends is a friendship version of the main bumble service that has been a success and is live in the United States as an own standalone app. After Covid-19 this is especially important to help foster in-person relationships especially among Generation Z. Gen Z has had strong engagement so far with 34% more usage from Gen Z users on BFF giving it longer term monetization potential. Long term management sees this as increasing customer value, as they can continue to use Bumble products they enjoy even after finding a long term relationship. They are also adding both a mega premium tier and a low priced tier to the standard Bumble product. Bumble pointed out the demand for a higher priced tier, as for some money is no object and they want as much benefit as possible in finding a partner. On the low end, Gen Z customers are frugal especially with sky high rent prices globally right now. A very inexpensive tier will help them convert a larger portion of non paying customers to paid content than they have now.
These updates are working as Bumble has the highest net promoter score among women for dating apps – which is essential since men will go where the women are to engage.
Valuation in intriguing here with the stock trading at just 18x Free Cash Flow and 32x forward 2024 earnings. Revenue growth should be in the high teens for 2023 and mid-teens for 2024 which is a solid performance considering the difficult operating environment. Margins have potential to improve considerable in the long term, with close competitor MTCH at 22% operating margin in the past 12 months. Bumble needs more scale to reach consistent GAAP profitability but that should happen by the end of 2024. The current environment is only going to get more difficult later in the year, especially as student loan payments resume for some Bumble users in October. However, these downsides seem priced into the shares, down 50% over the past 52 weeks. Keep in mind MTCH trades at just 16x free cash flow as well, but with a much lower level of growth showing BMBL has no real growth premium at the moment.
Conclusion – Below $17 good for high risk accounts
While Bumble is intriguing purely on a valuation perspective, the current macroeconomic environment means strong headwinds. Bumble’s marginal user is very difficult to get to spend as much as before, which is shown in the declining revenue per user. While over time this will be solved with new offerings and a better economy, for now Bumble is in the penalty box. I see the stock range bound over the next 12 months. If the economy turns the corner and interest rates decrease the stock could double in a very short period. As a result I think the stock is a very speculative buy for high risk accounts, but for most investors I would wait on the sidelines for more clarity in the economy.