Swiping Right on MTCH

Disclosure: The author owns shares in the referenced company. This is not financial advice or a recommendation, and not a substitute for due diligence. 

Match Group (MTCH) is my surprising pick for 2024. That’s right, I may not be swiping on Tinder, Plenty of Fish, or Hinge, but I’m swiping right on MTCH. 

I’ve been following it since it entered the S&P 500 in September 2021 and then proceeded to plummet. I remember the first time I read the financials. While it met all the criteria to be added to the S&P 500 and revenues were in growth mode, operating margins appeared to be declining and they had enough items below the line to make earnings subpar. 

But, I love a good turn-around story– and Match Group has an intriguing one with new CEO Bernard Kim who’s been in the chair since May of 2022. The previous CEO had undergone an intensive acquisition strategy. Match.com started in 1993 as one of the first online dating websites, and the company in 2009 became the conglomerate Match Group (under parent IAC) and began buying up a host of dating apps including Hinge, Meetic, OkCupid, Pairs, Plenty Of Fish, and others. Tinder, now under the Match umbrella, was started and incubated in a startup incubator under IAC. Match Group went public in 2015. Critics of the previous management felt that while this acquisition strategy juiced the subscriber numbers and showed revenue growth, operational integration left much to be desired.  

As the quarters progressed, it looked like this might be a classic case of entering the S&P 500 and taking a nose dive shortly thereafter. Some companies will often do certain “accounting clean-up” that is not adequately lasting or, in the case of MTCH, might be the wrong strategy for changing macroeconomic landscapes. At the time, I didn’t know it well enough to go long or short.

After a year of lackluster performance, Bernard Kim, the former CEO of Zynga, was announced. As a side note, the deal was announced in early May of 2022 and he was on the ground by the end of the month. The first call was a classic announcement of cost cutting and rationalization (reorganization to reduce overlap/excess and become more efficient). MTCH had been on an acquisition shopping spree. The integration of the company was suboptimal. And even as the company entered the second summer of further dropping COVID pandemic mitigations, they just weren’t able to take advantage. While the US had more or less re-opened entirely, Japan and other markets were still hesitant to meet in public. 

In the September 2022 quarter, MTCH showed flat revenue growth with some operating improvement, but a lot of below the line items that made net income more or less flat. The company chose to use this year-of-not-getting credit to improve the business. Cash flow was cut nearly in half from paying down payables.

And you can see how despite flat revenue growth last year, there was no slow down in R&D expense. It increased 31%.

Most of this R&D had to do with improving “product.” Product for MTCH is the nature of subscriptions, boosts, and other ways to get people excited about spending on the various apps that MTCH owns. 

Most of the revenue comes from Tinder with Hinge’s success becoming a bigger part of revenue. While they haven’t historically provided a great break out of which dating apps provide the most revenue, they began providing better metrics in the last few quarters. Below shows a graph from the September quarter’s Shareholder Letter that gives a breakout. 

The new objectives that constituted the R&D expense of last year were discussed on the call. Much of it related to pricing strategies. In particular, younger users - which had been falling off for some time - had a notably different thought process as relates to pricing and what users might want to pay for. 

The improvement in pricing started to take hold almost immediately. Below you can see the improvements in a-la-carte revenue in the last quarter of 2022 into the beginning of 2023. 

Over 2023, there’s been improvement across Hinge and Tinder as they’ve improved their pricing strategies. Subsequently, MTCH has started to show steady growth with improvements to operating margins. 

And this is likely the most intriguing aspect of MTCH. Given the nature of the business, their operating leverage--provided they can maintain a dominant position in this evolving industry--has certain economies of scale that make for attractive long term margins. The capacity constraints of the app are low and the more individuals that join, the more choice there is for users. 

If we look at multiples, the stock has 275mm shares outstanding and currently (as of the date of this post) trades at $35.20 per share or about $9.57B in market cap with trailing revenue per share of $11.81 and trailing $1.77 in earnings per share (EPS) or $19.80 trailing earnings. The Street is seeing a fairly aggressive $2.60 EPS for the future on account of some easier comparables, buybacks, continued growth and cost savings. This puts the stock around 13.5x price to earnings growth (PEG). Last year, it grew 26%.

You can also see that cash flow has improved nearly back to its 2021 levels:

And while there is still notable spend needed to evolve the business, it is small relative to the free cash flow generated, so there should be little issue repaying the company’s debt which at September quarter-end totaled $3.8B, and manageable chunks that will come due each year. This is particularly true, given how low the rate is on this debt, and the relatively small interest expense as seen in the tables below. 

That said, eliminating interest expense would add more than 20% after tax to earnings.

Still, given the company’s trend in earnings growth, even if rates remain elevated, the best use of capital would be to further fund growth vs paying down debt. 

I’m seeing positive results from MTCH, and it seems the new CEO has put the company on the right path. Hopefully 2024 will be a good year and we won’t have to unmatch.