Deep dive into Match Group ($MTCH)

1.0 Introduction

Match Group is a company that continues to benefit from the (sad) society in which we live.

The best way to introduce it is by sharing the apps/brands it owns:

– Tinder, Hinge, Match, Meetic, Plenty of Fish, Pairs, Azar, Hakuna, and many more.

The estimate is, it has ~50% market share in the U.S. and impressive profitability.

Here's its revenue and operating margin over time:

2019: $2.1b (32% operating margin)

2020: $2.4b (31% operating margin)

2021: $3.0b (29% operating margin)

2022: $3.2b (26% operating margin)

2023: $3.4b (27% operating margin)

There are two key points:

1. This is a resilient business – Regardless if there's a pandemic or inflation, there is always demand for connecting with another human being(s).

2. The operating margin has decreased – At first glance, this might seem concerning, and you might wonder: Is this a trend?

The lower margin is caused by the management's decision to increase the R&D expense significantly (it was 7% of revenue back in 2019, to 11% in 2023). This is expected to generate value in the future by introducing new products, or new features as part of the existing products. However, it is clear that the the current margin decrease is the outcome of a conscious management decision, and is not caused by outside pressure.

If the additional R&D expense isn't adding value, the management will reverse it, which will bring its old profitability back. With this in mind, I don't see any reason why the operating profitability would further decrease.

2.0 The Worrisome Society

2.1 The world is changing and the internet has a significant impact on how couples meet. Based on a survey, more than 50% of the couples (in the U.S.) have met online. This number has doubled over the last decade, meaning the number of dating app users has increased. This doesn't come as a surprise, but given that the younger generations are tech-savvy, I don't think we've reached the peak (yet).

2.2 Not only that, but the new generations are using more apps. Based on Match Group's investor presentation back in January 2023, The average number of apps used by individuals under 35 was 4.3 (vs. 3.8 for the average of all groups combined). I would not be surprised if this widens further.

2.3 Lastly, there are fewer marriages, meaning the apps are being used for a longer period of time.

To summarize, we have more users, using more dating apps, and for much longer.

3.0 The Biggest Concern – Competition

Of course, every company (and industry) has competition. Given the market share, it seems as if Match Group is winning this battle, by a wide margin. Being the biggest fish in the sea, it can create the biggest network effect. The more people use an app, the higher the value it generates for its users.

The biggest concern that many have is – Meta. As Facebook and Instagram are dominating worldwide, in theory, these apps should be able to capture a large portion of the market, quickly. However, the reality is different:

1. Facebook Dating was launched back in 2019 and it hasn't been a huge success.
2. Facebook was founded back in 2004. It has been two decades and Mark Zuckerberg has now focused on the Metaverse.

It is quite clear that targeting this market isn’t a priority for Meta at this very moment. It doesn’t mean it will never be, but the chances seem quite slim.

4.0 Valuation

Based on my assumptions, the fair value of the company is ~$14 billion ($39/share) – slightly above the current share price of $34.

The two key assumptions I have are:

1. Revenue growth of 54% over the next decade – I think this is fairly conservative. The change in demographics, combined with price increases makes this easily achievable.

2. Operating margin of 26% – This is below their historical average and assumes the management continues with the current level of R&D.

Here’s how the valuation (per share) changes if you have different assumptions than mine, regarding the revenue growth over the next decade, and the operating margin:

As I'm writing this, the share price is $34.

• If the company grows its revenue at ~4% CAGR, the market expects its profitability to decrease below 26%.

• If the profitability remains at 26%, the market expects the revenue to grow below ~4%/year.

Based on the analysis above, I don’t see data that supports any of the two scenarios above.

I hope you enjoyed this post, feel free to share your thoughts.