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Morningstar | Match 3Q Results Beat Expectations, but Guidance Was Disappointing; Shares Fairly Valued

Match Group’s third quarter results came in ahead of our expectations and consensus as the double-digit revenue growth was again driven by Tinder, which also created some operating leverage and expanded margins year over year. The firm provided fourth-quarter and full-year guidance, and while next quarter’s revenue guidance was below the Street’s estimates, we note that Match expects 2018 total revenue to be in line with consensus. However, Match’s 2019 revenue growth guidance of midteens was disappointing, in our view. The firm also announced a $2 per share special cash dividend that will benefit Match’s shareholders of which the main beneficiary is IAC which owns over 80% of Match. We lowered our 2018 and 2019 revenue projections slightly, but also increased our operating margin assumption as we still expect top-line growth to outpace growth in marketing expenses, albeit Facebook’s looming threat. Changes to our model did not impact our $45 per share fair value estimate of Match Group. The disappointing guidance pushed Match shares down 17% today and the stock is back in 3-star territory, from 2-star. While Match is now trading at a discount to our fair value estimate, we continue to recommend waiting for a wider margin of safety before investing in this narrow-moat and high uncertainty-rated name.

Match reported total revenue of $444 million, up 29% year over year as the firm’s paying subscribers (paid member count, or PMC) increased 24% from last year. Such PMC growth was accommodated by 4% year over year growth in average revenue generated per user, or ARPU, which we view is indicative of the firm’s success in rolling out new premium features, mainly on the Tinder app such as Tinder Feed, TinderU, and Picks, which was rolled out in late third quarter. We must note that the firm continues to invest heavily in R&D and marketing of its other apps, including Match.com as the look and feel of those apps require some changes in order to attract more users. Continuing improvement and growth in the monetization of Tinder, was partially offset by lack of subscriber and revenue growth in most of the non-Tinder apps. However, the popularity of Hinge, an app for the millennials, seeking long-term or serious relationships, may indicate that Match’s dependency on Tinder could decline a bit in the future, which we view as positive.

Indirect revenue, which is mainly advertising revenue, declined 14% year over year as the implementation of GDPR is impacting Match’s ad inventory sales. Plus, on the Match.com app, the company is making some changes to its user interface including showing fewer ads in order to keep users on the app longer. Adjustments such as this are also lowering ad revenue. Over time, we expect the impact of lower ad inventory sold to be partially offset by higher prices as growth in Match’s non-Tinder apps subscribers and user engagement will again attract the ad dollars.

Match generated $140 million in operating profits during the third quarter, representing a 31.5% margin, up 5 percentage points from last year, but down 420 basis points sequentially as the firm is incurring some additional litigation costs related to the case involving Bumble. In addition, Match’s more aggressive marketing efforts for not only Tinder but also Hinge will limit operating margin expansion. We expect this to continue throughout the fourth quarter and most of 2019. However, we look for some operating leverage and margin expansion in late 2019 as growth in revenue, mainly driven by Tinder and the further rollout of Hinge, and some stabilization in Match.com, is likely to outpace operating expense growth.

The better-than-expected third quarter revenue did not alter Match’s expectations for the fourth quarter, and the firm maintained its full-year revenue guidance of around $1.72 billion. For 2019, Match provided revenue growth guidance of midteens which was below consensus. Given the much better than expected performance in the first nine months of 2018, it appears that Match may be facing some tough comps. Plus, the monetization of Tinder may be slowing down as fewer users could be adding fewer new premium features to their subscription. However, the company’s rollout of TinderU, Tinder Picks, and the Hinge app is likely to accelerate ARPU growth slightly beginning in 2020. We have modeled a 17% five-year revenue CAGR for Match through 2022, down slightly from our last 18% estimate. Last, we expect average annual operating margin of 37% for the firm during the next five years, higher than our previous assumption of 36%. We remain confident that the firm can hit its 40% long-term operating margin objective, likely in 2021.