Is Match Group Stock a Keeper?
I’ve been watching Match Group’s (ticker: MTCH) stock for a while now. It was actually the only stock Ryan and I both put on our Christmas lists on this week’s Chit Chat Money. The company trades for a reasonable price, and it looks like they are building a moat in a fast-growing and lucrative industry: online dating.
Match Group owns major platforms like Tinder, Match.com, OkCupid, and more. Tinder is their biggest growth driver at the moment.
Let’s go through their financials, project some conservative future numbers, and go through whether the online-dating industry can continue its growth over the next decade.
Financials and Valuation
Here is a list of some of the relevant metrics and growth figures for anyone considering buying shares of Match Group:
Market cap of $19.9 billion
EV/FCF of 34.7
FCF margin of 31.2%
ROIC of 26.44%
EV/EBIT of 32.8
Revenue growth of 22%
Subscriber growth of 19%
Average revenue per user (ARPU) growing 4%
(You can check-out these metrics and more at Stockrow.com.)
A few numbers I like are the cash flow margins and ROIC (return on invested capital). If you couple these numbers with sustained top-line growth, the stock should thrive for years to come. However, as with any business, future growth is not a guarantee.
Continued growth is a big deal for Match Group. It trades at almost 35-times FCF, which means a good amount of future earnings are already baked into the stock price. Determining how much upside is still left is what investors should be deliberating. And that is what I intend to do below.
Looking out Five Years From Now
My favorite thing to do when evaluating an investment is to look five years down the line and make some conservative, back-of-the-napkin estimates. This shows how much upside there is if my investment thesis proves to be correct.
Let’s do that for Match Group. Below is a table of future FCF numbers over the next five years, assuming they can average 17% sales growth (a small slow-down from their current rate) and keep their current cash flow margin of 31.2%.
YearRevenueFCF20192.054*0.64120202.4030.75020212.8120.87720223.2901.02620233.8491.20120244.5031.405*Estimate for FY 2019, Billions.
Based on a conservative cash flow multiple of 25, Match Group would have a market cap of around $35 billion at the end of 2024. That is around 1.75x the current market cap, or 75% upside from the stock today. 1.75x is not terrible, but once you add in the fact that there isn’t 100% certainty of this happening, I don’t think Match belongs as high up on my watchlist as I originally thought.
Who knows, maybe my revenue projections are way too conservative (they are certainly not certain). If so, there is obviously more upside for the stock.
To wrap things up, let’s look at the online dating industry as a whole and see how Match, well, matches up to the competition.
Online Dating: At the end of the S-Curve
There’s no doubt that online dating had its coming-out party in the 2010s. Tinder went mainstream for people under 30, and it is now socially acceptable to say you met online.
In 2018, dating services were a $3 billion business. Remember that Match Group is projecting sales above $2 billion for 2019, meaning they have the majority of the market and basically a monopoly in the industry.
The beautiful thing about these dating services, especially Tinder, is the moats they build through network effects. Tinder has one of the strongest network effects of any digital platform. No one will leave the service because everyone is already on it, and it is very hard to start a new platform because you need to convince thousands of people to join before it is viable.
It’s not a classic “Warren Buffett-style” moat, but it is a moat nonetheless.
What concerns me is the projections for revenue growth to slow over the next few years. By 2022, the online dating industry is expected to only be growing 2.9% annually, a huge slowdown from where it is currently.
Match Group has historically outperformed the whole industry, but a rising tide lifts all boats, and it looks like the tide is starting to go out on this business. That’s not to say, by any means, that online dating is going away. But the huge growth we saw this decade likely won’t be repeated, and it definitely will affect Match’s potential for high levels of growth.
Overall, I love Match Group’s business and think it will continue to grow over the next decade. Tinder is dynamite from a cash flow perspective and could end up being the dominant player in a few years. However, one can’t ignore the premium valuation, projected slowing growth rates, and trendiness of the industry. I could see myself owning shares at the right price, but the potential upside isn’t worth the risk in a market right in the middle of a disruption phase.
Disclosure: The author is not a financial advisor, and may have an interest in the companies talked about.