Match Group Stock: A Business Powered By Lovebirds (NASDAQ:MTCH)

Investment thesis

After a protracted decline since 2021, we believe Match Group’s (NASDAQ:MTCH) shares have come into buy territory. The company dominates the market of online dating platforms, which allows it to steadily increase prices for paid features, and its updated 2024 strategy could create additional momentum to revitalize financial results and stock performance.

Business overview

Match Group operates online dating apps. The company originally was owned by IAC until July 2020 when the business was spun off in an IPO.

Match Group has the world’s largest portfolio of dating apps, including the following:

• Tinder – the world’s most popular dating platform and the company’s primary revenue source. As of the end of 2023, the platform brings in almost 60% of the company’s total revenue.
• Hinge – a fast-growing alternative with a focus on such regions as the EU and UK. Its main difference from Tinder is a more elaborate system of profiles and filters to help make potential matches. The platform brought the company a mere 4% of total revenue in 2023, but the pace of its revenue growth has topped 40% y/y.
• Match Group Asia – a portfolio of apps with a focus on Asian countries. It includes such services as Pairs, Azar and Hakuna.
• Evergreen & Emerging – a portfolio of platforms that were either created in the 1990s or 2000s or are smaller developing platforms with a narrow focus. For example, the oldest service, Match (dating back to 1995), targets people looking for long-term relationships (mostly the older generation); Plenty of Fish (2003) has an option for live streaming; BLK (2017) targets the black community; while Chispa (2017) focuses on Latin Americans.

These are far from all assets owned by Match. All of them combined give the company a near monopoly in the online dating market, with the only major competition represented by Bumble.

Monetization happens through subscription fees and advertising. The company receives about 90% of its revenue directly from users, by selling them premium accounts (offering such options as unlimited swipes in Tinder or other features that are not available for free accounts).

Number of paying subscribers

Online dating services can rarely retain users in the long term, as most often the customer stops using the service (at least for a while) after finding a match. Therefore, the industry is characterized by high churn rates and short duration of user activity.

From 2020-2021 the company delivered a fairly fast growth of the subscriber count: The number averaged 13.6 mln (+13.3% y/y) in 2020 and 15.5 mln (+14.3% y/y) in 2021, which was helped by accelerated digitalization amid the COVID-19 pandemic. However, the growth slowed to 5.5% y/y (16.4 mln) in 2022, while the subscriber count dropped to 15.6 mln (-4.5% y/y) in 2023 in light of the relatively high base (according to a survey by Statista, about 9 to 17% of global population have tried out dating apps) and user response to rising prices of paid features.

The churn mostly affects Tinder (-4.5% y/y) and legacy platforms. The number of subscribers on Hinge soared by more than 30% to 5 mln in 2023 (making up 8% of Match Group’s total monetized accounts). Given the relatively low penetration of the platform, we believe that the product will be able to maintain relatively high growth in the number of subscribers over the medium-term.

Medium and long-term forecasting of the number of subscribers is complicated by the fact that in addition to the penetration rate of the target audience, a large number of factors must be taken into account, such as user reaction to price increases, cannibalization of the audience by the company’s other platforms (for instance, when users switch from Tinder to Hinge), the average duration of the platform’s use by one user, as well as the proportion of repeat users that return to the service, and the average time from unsubscribing to returning.

In our forecast, we take a conservative view on the potential for audience growth, assuming that penetration rates are close to their targets and that much of the growth are users migrating from one platform to another.

We assume that over the next year the total number of subscribers will go down to 15.0 mln (-3.6% y/y) amid the ongoing outflow that followed the price increase, but it will come back to growth starting from 2025 and add 0.4% every year on average.

It’s important to realize that Match Group only discloses the number of subscribers, that is paying users, not the total number of users. According to Business of Apps, the number of active Tinder users was around 75 mln in 2022, while the number of paying subscribers was 10.9 mln (14.5%), and the numbers for Hinge were 23 mln and 1.1 mln, respectively (<5%) for the same year.

According to the company’s roadmap, it will come up with a lot of promotions and bundled offerings next year, which may help convert more free subscribers to paying subscribers. Also, some services are not yet monetizing certain developing regions, so we think there is a likelihood that the forecast for the number of subscribers will climb in the future.

Monetization of users

The American region remains the most profitable for the company in terms of average revenue per user. This indicator grows steadily due to increases in the prices of subscription and paid account features.

The metric averaged $70.68/year (+10.7% y/y) in 2023, and in America it was $76.73 (+15.4% y/y), delivering a record expansion following price increases.

Given the company’s near-monopoly position in the market of online dating apps, we assume it will continue to deliver steady growth in RPP. We expect the metric to total $79.2 (+12.1% y/y) in 2024 on the back of a more active monetization of Hinge, and $84.6 (+6.8% y/y) in 2025, before slowing to an average of 4.8% a year from 2026-2028.

Financial results outlook

Another source of Match Group’s revenue (~10%) is native advertising. Historically, the figure has been quite volatile and varied depending on contracts and the number of free users. Match plans to implement new marketing solutions in Tinder in 2024, but we do not expect this to significantly change the company’s economics.

We forecast that revenue will total $3 635 mln (+8.1% y/y) in 2024 and $3 906 mln (+7.5% y/y) in 2025, while it will rise at an average of 5.1% a year from 2026-2028.

Here are Match Group’s main cost items:

• Cost of revenue: fees to Apple and Alphabet for purchases in apps, salaries and other staff-related expenses, transaction processing fees, payments for hosting servers, rent of servers, etcetera;
• Marketing;
• General and administrative expense: salaries to managers and other employees of the head office, expenses on professional services and building maintenance;
• Product development: salaries to software developers and testers.

Historically, the company has delivered a stable level of profitability and most of the items haven’t been volatile. We assume that going forward the profitability of the business will remain stable, with conservative potential for margin expansion to be driven by price increases and helped by moderate hiring.

We anticipate a gross margin of ~ 71.3% over the entire forecast period, which is in line with the average historical level.

Match spent an average of 20% of revenue on advertising from 2019-2021. However, the proportion dropped to ~17% in 2022 and 2023. We expect that in the next year this cost item will rise to $687 mln (+17.2% y/y) due to a major advertising campaign for Tinder, which targets the Z generation and highlights the service’s fresh AI-powered features, but the advertising budget will afterward be adjusted proportionately to revenue (~17.1%), meaning it will total $667 mln (-3% y/y) in 2025.

With respect to administrative costs, we don’t anticipate the headcount to expand (except when it could be caused by potential M&A deals), so we expect the costs to rise along with salary increases, or by an average of 2% year.

R&D costs averaged 7%-8% of revenue from 2019-2021. However, starting from 2022 the company bumped up its IT staff, and the costs jumped by 38% y/y in 2022 and by another 15% y/y in 2023. Given Match Group’s ambitious plans for Tinder, we believe the costs will climb by $40 mln to $424 mln (+10.4% y/y) in 2024, but we don’t see a need to expand the IT staff going forward and assume that some of them will be let go. Considering the projected growth in salaries and the presumed staff reductions, we believe R&D expenses will total $417 mln (-1.8% y/y) in 2025, and will rise by an average of 3% a year from 2026-2028, making up ~10% of the group’s revenue.

The company pays some of its salaries in the form of shares. The dilution was valued at $204 mln (+39% y/y) in 2022 and $232 mln (+14% y/y) in 2023 on the back of the rising headcount in the IT department. The management has guided for a stock-based compensation equivalent to $270 to $280 mln (+18.5% y/y at the average level) in 2024. Going forward, we expect that 14.5% of the payroll budget will be paid out in the form of shares.

Given the outlook for revenue and operating costs, we forecast that GAAP EBITDA (including diluted earnings) will total $1 052 mln (+2.5% y/y) in 2024 and $1 270 mln (+20.7% y/y) in 2025. The non-GAAP metric is set to total $1 327 mln (+5.5% y/y) and $1 555 mln (+17.2% y/y), respectively. The slower growth in 2024 is attributable to a one-off increase of spending on marketing and R&D.

The company’s generation of free cash flows is stable, working capital as a rule doesn’t have volatile items, and neither does the capital expenditures program.

We forecast that free cash flow will reach $1 020 mln (+23% y/y) in 2024 and $1 166 mln (+14.3% y/y) in 2025, which would be equivalent to conversion from adjusted EBITDA at a rate of 75% and a yield of 9.8% and 11.2%, respectively.

This rate of cash generation will allow the company to maintain its share repurchase program at least at current levels, or spending about $500-$600 mln per year (meaning a yield of ~5-6%), which abundantly makes up for the dilution caused by stock-based compensations to staff.

Significant debt repayments will start from 2026: $500 mln in 2026, $450 mln in 2027 and $500 mln in 2028. Even so, we estimate there will be enough money to repurchase shares over the entire foreseeable period.

Associated risks

From the perspective of risks, we can highlight the following:

• Falling subscriber count: although Match Group holds a substantial share of the online dating market and will unlikely be sensitive to competition, there is a limit to the organic growth of its audience because a significant portion of the public is already familiar with similar platforms. Although we don’t place our bet on the level of penetration to rise at a rapid clip, and take a conservative view on the potential for the number of paying accounts to climb, a low rate of return to the platforms could take a toll on financial results and share performance.
• Failed M&A deals: in addition to organic development, Match Group regularly expands its asset portfolio by making minor purchases, which is especially appropriate in developing regions. As a rule, native services do not develop rapidly in the future and can rarely reach beyond their region (Hinge was the only exception). Because the value of deals with such companies tends to be small, we do not assess them as significant risk.

Other than that, Match Group is fairly stable in terms of strategy and doesn’t overstep risk-management boundaries when it comes to investment.

Valuation

From the perspective of multiples, Match Group was previously valued unreasonably highly, but following the descent from the peak of 2021 on the back of the slowing growth in the subscriber count it now looks fairly alluring (12.7x GAAP EV/EBITDA and 10.1х non-GAAP EV/EBITDA FWD).

Given the high volatility of historical multiples, for valuation purposes we use industry-average multiples (of 12.5х), which are multiplied by the projected growth and GAAP EBITDA.

According to our calculations, a Match Group share has a fair price of $47, after a 13% discount is applied, which means an upside of 26%. The status for the stock is HOLD.

Conclusion

We believe that fundamentally the company is well positioned and will benefit from a broad adoption of solar energy. However, a large number of associated risks, including sketchy disclosures, poor predictability of financial results and strong affiliation with China justify the high discount to other publicly-traded companies. For the long term, the company looks alluring due to low valuations, but we recommend investors to open a position for no more than 3% of their capital.

To manage your position, we recommend following Match Group financial reports.