Match Group: Am I Still In Love with This Stock?
Match Group, despite recent challenges, remains a compelling investment opportunity due to its strong free cash flow, improving profitability, and potential for growth in untapped markets.
I. Trends in Online Dating
A Standford University study (How Couples Meet and Stay Together) surveyed how Americans meet their spouses and romantic partners over time.
In 2017, around 40% of couples met online. That makes online dating by far the most common way American couples meet. The chart below shows you everything you need to know about the trend.
Online dating is still stigmatized in certain age groups and geographies, especially in Eastern culture. Despite this, dating apps have managed to gain popularity in Asia thanks to COVID-19. India had the highest adoption rate at 57.2%, followed by Thailand at 46.5% and Malaysia at 32.4%.
In India, 78% of respondents think that there has been increased usage, followed by Indonesia and Thailand, where slightly more than half of respondents think there has been increased usage (58.6% and 56.8%, respectively).
The global online dating market was valued at approximately $10.09 billion in 2023 and is projected to reach $17.37 billion by 2031, growing at a CAGR of 7.03% from 2024 to 2031.
Another report indicates that the online dating application market is expected to reach $12.25 billion by 2030, with a CAGR of 5.5% from 2022 to 2030.
A different analysis noted that the market exhibited a valuation of $7.94 billion in 2022, with expectations of steady growth at a CAGR of 7.6% through 2030.
The main takeaway from these market trends is that online dating is here to stay. The important question is whether there will be one dominant player in the market, or if MTCH's strategy of launching different brands to appeal to diverse markets will be successful. This is an intriguing topic for discussion, and it's clear that using multiple dating apps simultaneously will continue to be a trend.
II. About MATCH Group
The company began in 1993 and has undergone several mergers and acquisitions since then. It was initially acquired by CUC International, which later merged with HFS after running into trouble. Following the merger, the company was sold to IAC in 1999. In 2009, IAC incorporated the company as Match Group, marking a new beginning for the company.
The company has always been focused on growing inorganically and has made several acquisitions to expand its customer base and maintain its dominance in the market. From 2009 to 2022, MTCH has acquired several companies like OkCupid, Hyperconnect (Korea-based), The League, Hinge, and Plenty of Fish, among others. There are several strategies that the company has undertaken to establish its position as a market leader:
1.    Network effects: With each new platform, Match Group's overall user base grew, making each platform more attractive due to the wider pool of potential connections.
2.    Freemium Model: Most platforms offer a basic free experience with premium features for subscribers, generating recurring revenue.
3.    Targeted Marketing: Different platforms cater to specific demographics and interests, allowing for targeted marketing and user acquisition, i.e., The League caters to a career-driven couple.
III. My $0.02 on Match Group
Overall, Match is a good business driven by several factors, but there is a note to be taken into consideration.
1.    Improving and healthy ROIC: The company has managed to improve its return on invested capital (ROIC) for the past two years, increasing it from 3.14% in Q2'22 to 17.62% in Q4'23. This was possible due to operational improvements, such as gross margin increasing from 39.5% in Q2'22 to 72.14% and becoming profitable with a 27% Operating Income in Q4'23. The management has proven to be successful in investing capital in the right places.
2.    Strong FCF engine: The company has consistently recorded a positive and stable free cash flow (FCF) of $829M in the last twelve months. It has been distributing capital to its shareholders through share buybacks with 50% of its FCF.
However, it is important to note that the company's profitability performance is still below the pre-COVID level (Operating Income in 2019 was 31%), and revenue growth between 2022 and 2023 has been single-digit (6%) compared to the double-digit growth that the company previously experienced.
a. On price performance
Looking at MTCH's price performance over the past five years, it's clear that the COVID-19 lockdown had a significant impact on it. In 2020, the price-to-earnings (P/E) ratio of MTCH was 72x, which then grew to 142x in 2021 due to the pandemic. However, as the COVID situation subsides and activities return to normal, people and the market realize that the future growth of MTCH might not be as promising as it was during the pandemic. This led to a downward adjustment of P/E to 16x in 2023.
Considering the impact of the pandemic, MTCH has been able to adapt its business during turbulent times and consistently generated healthy free cash flow, which it has distributed to its shareholders. Additionally, the company's revenue has consistently grown from 2019 until 2023 at a compound annual growth rate (CAGR) of 14%.
While market multiple compression might be beyond management's control, management has consistently performed well and even surprised the market's earnings consensus on growth in 2023. However, they are yet to improve their performance in 1H 2024; poor Q1 performance, as the Net Margin fell to 14.3%, signifies that the company has not yet found its best formula to crack the market.
b. On execution
The reduced expectation of future growth, particularly after the COVID situation started to improve, has directly impacted MTCH management's ability to meet their targets. As shown in the table below, when MTCH share prices began to decline in 2021, the company missed its EPS prediction by 56%, and this trend continued until 2022. Only in 2023, when the P/E ratio started to normalize around 16x, the company was able to exceed market expectations and improve its EPS by 16%
c. On management incentives
Yes, I believe the management incentives are appropriately structured. The vast majority of compensation, almost 85%, is at-risk, which will motivate management to take a more aggressive approach to grow the company and provide a higher return to the shareholders. Despite being a market leader in the US, there is still a lot of potential for growth outside of the US. With the recent acquisition of the Korean-based app, Hyperconnect, management plans to actively expand the market outside of the US and increase its presence in APAC.
One area of improvement for the salary structure could be the portion of PSUs earned and vested, which is currently determined by the "rTSR multiplier." If the company's TSR is negative, the maximum rTSR multiplier possible should be reduced to 50% or even 0% due to the poor performance of the company.
d. On recent performance
There are some positive notes in the Q4 and FY 2023 results. The top-line growth was driven by the strength of Tinder and Hinge, and there was solid momentum across the Americas and Europe regions. MTCH reported fourth-quarter 2023 earnings of 81 cents per share, which was a significant increase from the 30 cents per share reported in the year-ago quarter. The management also intends to launch new features such as swipe up and swipe down to increase engagement and improve experience and curation.
One interesting piece of information is that management expects first-quarter 2024 revenues to be in the range of $850-$860 million, indicating year-over-year growth of 8% to 9%. This is surprising because it is lower than the past CAGR of revenue from 2019-2023, which stands at 14%. This shows that management is being careful and is not 100% sure how the recent acquisition and APAC performance will impact future performance.
e. On activist’s movement
Elliott Management has noticed that MTCH stock had a poor performance in 2023, with a 17% decrease throughout the year. However, considering the performance of ROIC and steady cash flow, this activist hedge fund might be confident that an activist transaction could spark interest in the broader market. This could help the management to take more drastic measures to revive its stock price.
Considering MTCH's long history and inorganic growth, Elliott Management is expected to push the company to make more acquisitions in under-penetrated regions, such as APAC, to further boost its earnings. Additionally, given its positive track record, Elliott might be confident that the management will be capable of driving the necessary changes.
f. Concluding thoughts
If I were a member of the MTCH board of directors, I would approach the product from two perspectives. Firstly, I would focus on leveraging AI to enhance the customer experience. This could include incorporating an in-app bot to provide customers with further convenience, such as selling an AI bot service that offers suggestions for date ideas, books date locations, or provides gift ideas based on the individual's interests. Secondly, I would look to optimize pricing to make it more affordable for a larger market while simultaneously reducing competition from other platforms like Bumble.
Furthermore, given that the demand for online dating platforms is expected to increase in the coming years due to the growth of social media and how people interact and work, I would recommend that MTCH identify the next big market and either develop a new platform from scratch or acquire existing platforms that can contribute to growth in the next five years.