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Continued social distancing measures enhance the value proposition of virtual dating and Match Group’s portfolio of virally popular brands remains well-positioned to capitalize on the increasing TAM of online dating site/app users. I see further engagement continuing above pre-COVID levels and the solid blueprint laid by Tinder, paving an accelerated path to profitability across the non-Tinder brands (particularly Hinge). I issue a buy rating with a $141 price target implying a 14.2x EV/Sales multiple to my $2.8bn FY21 sales estimates, slightly lower than consensus.

Financial Summary

Match Group comfortably beat the street’s revenue ($640m vs $623m high est.) and EBITDA ($249m vs $228m est.) estimates as momentum picked up in 3Q20, with management raising FY20 revenue guidance to ~$2.39bn – in-line with my estimates as well as consensus.

North America (NA) led the march and continued its reversal of pre-COVID negative trends adding 409k subscribers sequentially and growing revenue 20% YoY (vs 13% YoY in 2Q20). Strong in-app purchase activity at Tinder, Hinge and PoF drove NA ARPU, $0.66, 4 cents higher YoY with International ARPU, $0.58, reversing a three-quarter sequential slide thanks to a pick-up in the higher ARPU Pairs subscribers.

Increased in-app purchase activity saw gross margins fall again to 73.5% (-102bps YoY), partially offset by the positive impact from a YoY declines in relative sales, marketing and product development, leading to an 80bps YoY expansion in adjusted EBITDA margins.

Despite the incremental $3.9bn net cash distributed within 2Q20’s IAC separation transaction, liquidity remains strong with a cash balance of $399m and a further $750m available under their Feb 2025 Credit Facility as of 3Q20. The Group have also moved 0.5x closer to their 18-month post-transaction net leverage target of 3.0x – aided by their greater than expected EBITDA.

Source: Bloomberg, My estimates/adjustments

Are these levels of online dating engagement here to stay?

Yes. Prior to the pandemic, Gold’s momentum on Tinder average subs was strong but showing early signs of slowing, with ARPU and direct revenue growth subsequently beginning to fizzle. Meanwhile, non-Tinder average subs and ARPU continued flat or lower trends in 2019 with non-Tinder revenue compounding at a negligible 0.9% rate between FY15-19. MTCH shares spent much of 2019 range bound between $65 and $85 as investors waited for the next catalyst to accelerate growth.

Tinder continues to shine

The COVID-19 outbreak has clearly marked an inflection point in this deceleration. Sequential subs growth accelerated to ~400k in Q3, rebounding from Q1’s 133k number (lowest on record since IPO), driving Direct Revenue 18% higher YoY despite lockdown measures beginning to ease across the world. User activity (swipes and messages) remained a solid double-digit higher than pre-COVID levels with the platform continuing to lead the app grossing ranks (Lifestyle category) in over 100 countries. Tinder Gold continues to deliver on its objectives to engage and grow paid subs with the platform averaging 337k incremental subs per quarter in the Gold-era vs 246k in Tinder Plus only era.

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I see Tinder’s Swipe Night, launched in Sept with already 15m+ viewers engaged, continuing to drive a NA rebound into Q4, offsetting the regular holiday period sequential decline holding NA paid subs ~5.1m. Management’s track record in executing with on Tinder product objectives leads us to believe in a solid rollout of Platinum (an ARPU driver) in Q4, particularly with the early positives drawn from the 10 test markets. We see Platinum’s enhanced value proposition and Swipe Night’s creative in-app engagement driving our NA ARPU estimates higher QoQ to $0.65, albeit at a lower 3.7% rate, particularly as lockdown measures across the country return.

The next growth frontier: Hinge and non-Tinder brands

Match’s broad range of apps allows the group to gain insights into users from different demographics and dating preferences that provide for richer in-app experiences across their portfolio of brands. I see early signs of the emerging brands replicating Tinder’s success through the sequential YoY direct revenue growth of non-Tinder business in Q2 (9%) first time since 2016, followed by a 23% YoY growth in Q3.

Hinge has continued its meaningful traction with a rapidly expanding user base of 400k paid subs, 20 times greater than three years ago, catapulting the platform up the App Grossing rankings and into profitability ahead of schedule in 2Q20. Management sees revenue on track to treble in 2020 with the gradual roll-out of comparable a-la-carte features to Tinder such as the “virtual rose” translating to a user willingness to pay. The platform’s pricing reinforces its value proposition with its older userbase (24-32) justifying a premium fee to Tinder yet at ~24% discount to Bumble (18-24 average age group).

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Is management’s 40% adjusted EBITDA margin attainable?

I believe the declining relative sales/marketing spend and fading legal risks offset the headwinds posed by App Store in-app purchase fees. This provides further upside to adjusted EBITDA margin which I estimate to reach management’s long-term 40% target by FY29 in my base assumptions (FY26 in bull assumptions).

Fading legal risk

With the recent Bumble and FTC legal/regulatory scrutiny, Match can now focus their efforts on enriching the online experience for their 10.8M paid subscribers. Year to date, general and admin expenses of $239m were up $55k YoY with 10% of the increase coming from legal/professional costs – down from 50% of the $54k YoY increase in the previous year’s comparable period. I see added relief to EBITDA margins in the long-term once courts catch up to COVID-19 delayed litigation in FY21.

Viral adoption at minimal spend

App store dispute

The recent federal ruling allowing Apple to keep Fortnite off the iOS App Store implies that their 30% commission on purchases and subscriptions (15% after year one) is deemed fair – even more so when compared to that of peers. This is despite the added pressure from the “Coalition for App Fairness” and the continued regulatory scrutiny given Apple/Google’s 95% share of all mobile app spending. I see Apple as likely to hike fees closer to Twitch’s 50% subscription commission vs caving to the pressures of their leading developers given their increasing focus on services-based revenue. Match minimizes their App Store burden but incentivizing subscription purchases through their sites to avoid the perpetual 15% subscription charge – i.e. Tinder subscription pricing is ~11% cheaper on their site vs the App Store. However, their increasing in-app monetization efforts on Hinge and other rising apps will continue to provide a meaningful headwind to margins going forward.

Valuation

My $141 price target (DCF supported) implies a 14.2x forward EV/Sales multiple to my $2.8bn FY21 sales estimates. This lies a little above the midpoint of the comparable forward multiples of the more mature, lower growth social media giants (Facebook, Twitter; ~7x) and the younger, higher growth social media platforms (Snap and Pinterest, ~16/17x). Their dominant share of an unpenetrated market and relatively high margin, capital-light business model justifies this. Additionally, the range of growth profiles across Tinder and non-Tinder brands provides meaningful upside to further expand margins (vs a Facebook which is further into their monetization strategy or Pinterest and Snap which are cash flow negative and yet to turn a profit).

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Historically, investors have been willing to pay more for the growth potential within a greater TAM of dating app/users (see Exhibit 8) and I believe that the expanded forward multiple derived from the $135 implied share price (in-line with the current market price) is pricing in a COVID-19 driven expansion in TAM.

What’s more, I believe Bumble’s sought after $6-$8 billion IPO valuation will provide a swarm of interest to Match shares in 1Q20. The valuation implies a 20-27x price on the company’s expected $300m FY19 sales – an unjustified premium to the 18x price that Match currently trades at relative to their FY19 sales given Bumble’s inferior portfolio of brands.

Risk Factor(s)

Having largely addressed their regulatory concerns, I see the biggest risk posed from the shift of international revenue derived from countries outside of Western Europe and Australia. The allure of a greater upside from even less penetrated markets in Southeast Asia and LATAM, India in particular, has captured management’s focus. Regional economic attributes here tend to steer user habits more towards in-app purchases vs the preferable subscriptions. I see these new less, profitable users diluting ARPU and partially offsetting revenue growth – a trend particularly evident in the current market, as noted by management, given the discretionary nature of Match’s service offerings and increasing dollar relative strength.

Catalyst(s)

Experts have pointed to data showing how the pandemic has pushed users to become more intentional with their dating habits, a trend that we see being exacerbated in Q4’s “cuffing” season. I see this as a catalyst for Hinge and other relationship-focused non-Tinder brands to cannibalize Tinder’s paid subs base, accelerate a path to profitability and thus further diversify Match’s Tinder-centered business model with an older, more affluent paid userbase.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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