Investment Thesis
Match Group (NASDAQ:MTCH) remains the dominant global leader in online dating, but bears have soured on the stock due to slowing growth over the past year. At 13x forward earnings, Match Group is significantly undervalued given its robust core business fundamentals and growth prospects. While short-term challenges at Tinder have impacted results, Match boasts an unrivaled portfolio of top dating brands, including upstart Hinge, which position it for a return to strong growth. Match also sports excellent margins and cash generation that handily cover its manageable debt load. For long-term investors, Match provides a compelling opportunity to buy an industry leader at a substantial discount.
Unrivaled Brand Portfolio Drives Leading Market Position
As CEO Bernard Kim stated on the Q1 2023 earnings call, Match’s “purpose is to expand and innovate the dating experience for singles around the world.” The company’s unique competitive advantage is its unrivaled portfolio of top online dating brands tailored to different demographics and user preferences. This includes established names like Match, OkCupid, and Plenty of Fish along with younger-skewing apps like Tinder, Hinge, and BLK.
Match’s flagship app Tinder pioneered the “swipe” mechanic and remains the undisputed global leader in online dating. Tinder has risen to scale and popularity faster than any other service in the online dating category, and now boasts over 10 million paying subscribers globally. While Tinder has faced recent headwinds due to price increases in the US, its massive brand awareness and user base position it for an eventual reacceleration under new leadership and product changes.
Meanwhile, Match’s second growth engine Hinge is rapidly gaining share, especially among millennials seeking relationships. From essentially zero in 2018, Hinge has already surpassed 1 million paying subscribers and is projected to generate $400 million in revenue in 2023 per management’s guidance. As Swidler stated on the Q1 2023 call, Hinge’s “product-market fit has been clear in every market” during its European expansion. With a differentiated relationship-focused offering and its own viral growth, Hinge gives Match a second high-growth brand beside Tinder.
Bear Case Overly Focused on Near-Term Headwinds
Match’s results have been pressured over the past year by a pullback in online spending and stagnating subscriber growth at Tinder. However, bears extrapolating these near-term trends underestimate Match’s growth prospects. Tinder remains immensely popular among young demographics in North America and Europe. Per the Q4 2022 letter, management sees substantial room to reactivate lapsed users and attract new segments in these markets.
Product changes slated for 2023, including improvements targeting female users and a new premium tier, can reignite growth. As Kim explained on the Q1 2023 call, Tinder’s product roadmap will “redefine Tinder’s brand narrative” and “resonate with today’s younger generation.” Meanwhile, the rapid rise of Hinge also rebuts claims that Match’s growth days are over. Hinge is succeeding across English-speaking and European markets and still has substantial monetization headroom. As Swidler stated on the Q2 2023 call, Match is “confident that Hinge’s momentum will lead it to deliver approximately $400 million of direct revenue in 2023.”
Robust Margins and Cash Generation Support Growth
Match boasts excellent profitability, generating ~$530m in operating income over the trailing twelve months. This operating performance results from Match’s high-margin subscription-based business model. Trailing twelve-month free cash flow is $785 million, providing substantial capital to reinvest in growth. Match is guiding for approximately $800 million in free cash flow generation in 2023. This strong cash generation easily covers Match’s manageable debt load. Debt stands at 4 times EBITDA, which may be on the higher end but interest expense consumed only 5% of the last twelve months revenue.
With cash provided by operations well above capital needs, Match also announced a $1 billion share repurchase program on the Q1 2023 call, equivalent to 10% of its market cap. As Swidler explained, “our significant amount of free cash flow generation…factors into our capital allocation policy.” Match represents a rare combination of robust margins, minimal capital intensity, and subscription-based revenue that should continue driving strong future cash generation to fund growth.
Attractive Valuation Given Growth Prospects
At $37 per share, Match trades at just 13x forward earnings. These multiples sit well below high-growth software peers and fail to reflect Match’s dominant industry position. Estimates call for revenue to reaccelerate from 5% growth this year back to 11% growth in 2024, while EPS grows 14% annually over the next two years. Assuming the market appreciates Match’s dominance with consistent performance and awards it with a higher multiple of 15x earnings, my 2028 estimates are the following with 10% revenue CAGR and 15% EPS growth:
| Revenue | $5,450m |
| EPS | $5.67 |
| P/E ratio | 15 |
| Target price | $85 |
| Annualized Return | ~17.8% |
With Tinder stabilizing and Hinge continuing to gain share, Match’s growth story is far from over. The current valuation leaves substantial upside once the market recognizes Match’s long-term potential.
Risks and Conclusion
Match does face risks going forward. Competition is increasing in online dating from players like Bumble, forcing Match to constantly enhance its brands’ positioning and features. A prolonged macro slowdown could curtail online spending and dating activity. Execution risks also exist around revitalizing Tinder’s growth and monetizing Hinge’s rapid user gains. However, Match’s portfolio approach provides diversity, while Tinder and Hinge’s strong momentum rebuts claims that its best days are past.
At the current valuation, which is a fraction of its historical earnings multiple, Match represents a rare opportunity to invest in an industry leader at a bargain. Match’s unrivaled brand portfolio, expanding growth opportunities, and excellent cash-generation capabilities make it a compelling investment. Share repurchases provide additional support to the share price. For long-term investors, Match provides a low-risk pathway to substantial upside over the coming years.
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