Tonktiti
Brief History
Bumble (NASDAQ:BMBL) was founded by Whitney Wolfe Herd as a “female-first” alternative to existing dating apps. Having cut her teeth as an early executive at Tinder (currently owned by competitor Match Group), Wolfe Herd believed women that used dating apps were turned off by stories of aggressive engagement by men and would welcome an alternative that required that they make the first move. She received an early investment from Andrey Andreev, the founder of then Russia-based Badoo, which offered a similar dating service in Europe and Latin America. In 2019, Badoo and Bumble were merged into MagicLab, which was rebranded Bumble. The company was ultimately backed by large Private Equity group Blackstone and came public in the hot IPO market of 2021. The stock reached a high of around $78, but as valuations for new issues retrenched and growth at BMBL failed to meet lofty expectations, the stock fell to its current level of around $10. At the beginning of 2024, Wolfe Herd was replaced by Lidiane Jones, who has since replaced other key executives. The core Bumble app has undergone a refresh that will be launched during Q2-2024.
The Company Today
Bumble (BMBL) offers online dating, friend-finding, and professional networking services through its Bumble brand (80% of revenue in 2023). This includes Bumble BFF (online friend finder app) and Bumble Bizz (professional networking). The remaining 20% of revenue comes from Badoo and other apps, including Fruitz (dating) and Official (for couples to improve their relationship). In 2023, 57% of revenue came from North America with the remaining 43% international. The company operates a freemium model which includes multiple subscription tiers. Included in the Bumble Premium subscription is Best Bees, an AI-powered match curation tool, showing the matches that have highest compatibility. Bumble’s female-first model requires that a female initiate the dialogue with new dating prospects while containing features that cover user safety and wellbeing. (The app refresh in progress may allow female users to opt in to allowing males to initiate the dialogue.) With 2.6 million payers and more than $1 billion of revenue in 2023, BMBL is the second largest online dating company behind Match Group (revenue of around $3.3 billion), which owns the largest app (Tinder) among several others.
Investment Thesis
Bumble is at a key inflection point. As the online dating market has matured, growth at Bumble has slowed and the company has been forced to respond to a new environment. Replacing senior management was an important step. Refreshing the core Bumble app and finding operating efficiencies are the next steps, and are well under way. Despite the near-term vulnerabilities that surround these moves, the valuation on BMBL already assumes a very bad case scenario. We believe the company is well positioned long term, and the valuation will start to reflect the quality of the business over the next 12-18 months.
Increased adoption should conservatively support 5%+ annual market growth. The advantages of online dating are enormous relative to traditional methods of meeting a partner. These include convenience, a larger pool of potential partners, the ability to connect with prospects that may be running in different circles or even people that live in different areas. The online platforms also provide efficiency benefits that come with filtering based on preferences and communicating in the app before giving out personal information or even agreeing to meet. Importantly, the use of online dating has quickly become a socially acceptable way to meet others. It is worth noting that online dating is a classic use case for AI, as the systems learn from user experience to drive improved “match” results. We don’t expect AI to revolutionize online dating, but the effectiveness of the apps will almost certainly improve over time. Grand View Research estimates over 7% average annual market growth globally over the next seven years. Growth in North America (57% of BMBL revenue in 2023) may be more modest, but should still keep pace with GDP growth. The US is considered the most mature market, and of the roughly 100 million singles between 18 and 65 years old in the US, it is estimated that only 20 million pay for online dating services, leaving adequate runway.
We believe Bumble will at least keep pace with market growth, sustaining 7-10% growth over the next 3-5 years.
- Currently, payer penetration is only about 10% of total users at BMBL. In general, we expect payer penetration to increase as users gain more comfort with the apps and increase engagement. Assuming AI improves the functionality and reduces or eliminates bot accounts, engagement and commitment should improve further.
- Tinder, owned by Match Group, is the largest online dating platform in the US. The platform grew like a rocket ship over the past several years. However, the reputation of Tinder appears to have shifted, and the app is experiencing significant turnover. During 2023, Tinder experienced a 9% decline in its paying user base. Specific metrics for additions and terminations are not disclosed, but if we assumed new users added represented 6% of the base, then 15% of the base (about 1.5 million users) terminated. Interestingly, toward the end of the year, the company significantly increased prices for the subscription tiers, which not only supports pricing for BMBL, but makes it likely that the churn may remain at a high level near term. This large group of singles that are willing to pay for online dating is a potential opportunity for BMBL.
- Badoo (Bumble’s second largest app) experienced challenges in 2022 and 2023. The most significant was the termination of all business in Russia following Russia’s invasion of Ukraine. From 2021 to 2023, Badoo/Other revenue actually declined from $233 million to $207 million. However, Badoo appears to have finally stabilized as revenue from Badoo/Other actually grew 4% (0.5% in constant currency) in Q4-2023, and management implied that growth should accelerate to at least 8% in the fiscal year 2024. Again, the segment only represents 25% of revenue, but should go from being a drag in the past two years to a positive contributor in 2024.
Significant margin expansion opportunities exist over the next several years. Adjusted EBITDA margin at BMBL was 26% in 2023, up from 25% in 2022 and management is guiding to 29% for 2024. EBITDA at MTCH has been running above 35% for the past several years. Gross margin for both BMBL and MTCH has been running around 70%, so while we do not expect BMBL to achieve Match Group’s EBITDA margin level, we do expect revenue growth to drive operating leverage, supporting a higher margin.
New management should help with innovation, new growth opportunities, and operating efficiencies. In 2023, founder Whitney Wolfe Herd stepped down and was replaced by Lidiane Jones, who has since replaced several key positions in the organization, including the Chief Product Officer, Chief Technology Officer, and Chief People Officer. Apart from the ongoing brand refresh, management is pushing for scale in their social platforms — Bumble BFF and Bumble Bizz. While we do not expect these platforms to become significant revenue contributors in the near term, we believe they will improve retention on the core dating apps, and possibly add prospects to the top of the funnel.
Valuation and Catalysts
In 2023, BMBL generated about $275m in Adjusted EBITDA on revenue of $1.05 billion. Early guidance for 2024 includes revenue growth of 8-11% and an increase in Adj EBITDA of 300 bps. Based on the current valuation, the market does NOT believe the guidance, in our view. As such, our model reflects a conservative approach to 2024 (and beyond). We assume 8% revenue growth (to $1.14 billion) and a 50 bps improvement in Adj EBITDA margin or $300 million in Adj EBITDA. As with many subscription-based platforms, the business converts a high percentage of EBITDA to FCF and for 2024, our model assumes $200m in FCF or about $1.50 per share. At a price of just over $10, the stock currently trades at 7.5x EV/EBITDA with P/FCF of roughly 8x. For comparison, MTCH trades at around 11-12x 2023 Adj EBITDA and FCF and 10x our estimates for 2024. Importantly, those are well below historical levels for MTCH. Bumble’s balance sheet should not constrain growth as net debt (under a conservative definition) is a manageable 2.5x EBITDA (below that of MTCH). Sometime over the next 12-24 months, we believe BMBL will re-rate to at least 12x FCF, which implies an $18 stock price on our 2024 estimate. This would represent an EV/EBITDA multiple of only 10x — undemanding for a business with BMBL’s growth and profitability.
Admittedly, there are no obvious near-term catalysts to drive a re-rating higher for BMBL. However, over the next 12-24 months, we expect the following to help bridge the value gap:
- Stable (albeit single digit) revenue growth and even a small shift in sentiment – We discussed the prospects for modest revenue growth in 2024 behind new management, a refreshed app, and a positive contribution from Badoo. Sentiment on the online dating space is abysmal today. Short interest on BMBL is over 20% of the float, and MTCH has taken on two sets of activists. While decelerated growth at Bumble accounts for some of the negative sentiment, we believe a much larger contributor is the user declines at Tinder which, as discussed above, could contribute to growth at BMBL.
- Aggressive share repurchases – In 2023, BMBL repurchased $157 million of stock, the vast majority of which was in Q4 and the first few weeks of 2024. With $123 million left on the authorization and adequate FCF, we expect ongoing repurchases and likely a new authorization for a larger repurchase. We would not be surprised if the company buys back 10% of outstanding shares in 2024. In discussing capital allocation on their Q4 call, management noted…
“We remain very committed to our buyback program.”
- Acquisition target? We see no obvious suitors for BMBL today, but at the current valuation, that could change if and when the M&A market heats up. Although Match Group could benefit from owning the Bumble brands, we consider it unlikely near term due to their current challenges with Tinder, likely DOJ resistance, and an already levered balance sheet at MTCH. Elon Musk has discussed bringing online dating to X, although we doubt X would be currently willing to fund any significant acquisition. META limped into the online dating world (Facebook Dating) in 2019 and might want to supercharge its presence. However, even at Bumble’s relatively small size, we recognize that the current DOJ would likely find a way to block that. A real longshot buyer could be TikTok, but that would only happen if/when ByteDance were to sell the business to a non-Chinese buyer. Given the margin and cash flow profile, the most likely buyer of BMBL could be a private equity group.
Risks
Sensitive to macroeconomic factors – Since most of Bumble’s revenue comes from subscribers, adverse economic conditions that affect consumers will negatively impact growth.
Vulnerable to brand degradation to the core Bumble brand – There are many stories of dates or relationships that end in a nightmare scenario. Whether or not the online dating app contributed to the “date gone bad”, the brand can suffer reputational harm. And since the Bumble brand is critical to the overall business, BMBL is particularly exposed here.
Persistent execution issues – As discussed above, Bumble is in the late stages of transition. The company has experienced a change in senior management and is undergoing a refresh of the core app and has recently announced layoffs. If the company is unable to smoothly roll out the refreshed app and retain key talent, results will suffer.
Aggressive competitive dynamics – Bumble is a distant #2 player to Match Group. Aggressive marketing campaigns, discounting, or talent poaching by MTCH would negatively affect the outlook for BMBL.
