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Morningstar | Match Beats 2Q Expectations and Raises 2018 Guidance; Increasing FVE to $45; Shares Fairly Valued

Match Group reported second-quarter 2018 results that easily beat our expectations and consensus. Tinder continues to add new users, of which more than half are paid subscribers, which we believe supports our network effect based narrow-moat rating of this firm. In addition, while the risk associated with Facebook’s plan to get into online dating remains, we continue to believe it will be a difficult task for Facebook to displace this narrow moat name. We adjusted our top- and bottom-line assumptions for our five-year model higher as new innovative features added to Tinder are likely to continue to drive strong double-digit revenue growth and create further operating leverage. Plus, the firm’s management upped its 2018 revenue and adjusted EBITDA outlook. Based on our higher projections for Match, our fair value estimate of the firm increased to $45 per share from $37. Match remains a 3-star name as the stock is trading 19% higher in reaction to the solid second-quarter numbers.

Second-quarter total revenue grew 36% to $421 million, driven by paid member count (PMC) and average revenue per user (ARPU), which grew 28% and 7% year over year, respectively, driven mainly by continuing user adoption of Tinder Gold. Match’s non-Tinder offerings did not perform nearly as well. While OkCupid and Pairs showed signs of growth, the firm said that others continue to decline, albeit at a lower rate. In our view, as Match’s dependency on Tinder increases, the firm needs to continue to invest in development of new and innovative features and possibly entirely on new apps to further diversify the portfolio and reduce such dependency.

For the fourth consecutive quarter, growth in North America PMCs accelerated, resulting in nearly a 20% increase year over year. International PMCs continued to outpace North America as they were up 38% from last year. Tinder subscribers grew by 1.7 million from last year, while the other apps’ net subscriber count likely declined by around 100,000. According to management, Tinder’s paid user count now represents more than 50% of total Tinder users, which we estimate is equivalent to nearly a quarter of Match’s total paid member count. This has clearly improved user monetization as overall ARPUs increased 7% from last year to $0.61, again driven by Tinder. North America ARPU of $0.58 was up nearly 4% year over year while international ARPU went up 14% to $0.56.

Given the higher-than-expected growth of Tinder, which we now think will continue, we increased our five-year PMC and ARPU growth assumptions for the firm to 14% and 3% from 13% and 2%, respectively. While deceleration in adoption of Tinder Gold is expected, we note that the launch of additional features such as Picks (which provides daily update of popular users to Tinder Gold users) and Tinder U (focused on college students) will drive further user and ARPU growth.

Another positive aspect of Match’s second-quarter results was the 32% growth in advertising revenue, driven by the addition of video features, along which video ad loads are included. We also think that Match’s higher overall user count is attracting more advertisers. Plus, the firm is likely selling more ad loads as programmatic online advertising helps the buyers and sellers complete the transactions and track ad performance much faster and more efficiently.

Strong revenue growth and some cost control, mainly in sales and marketing, created operating leverage and widened operating margin by nearly 900 basis points year over year to around 36%. Given the upcoming launch of Tinder U, the firm is likely to increase marketing spending as a percentage of revenue from second quarter’s 21% to within the 26%-29% range, similar to first-quarter and full-year 2017.

We now expect further margin expansion to accommodate the higher revenue growth during our five-year explicit forecast period, resulting in our higher fair value estimate of $45 per share. We think due to the firm’s network effect moat source and increasing Tinder brand awareness, sales and marketing expense as a percentage of revenue will decline gradually. For the same reason, we think the firm can also implement some cost control on product development in the long run. We now expect Match’s operating margin to increase to 41% by 2022, from what now appears to be a mere 27% in 2017.