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Morningstar | Match Reports Strong 4Q Results and Guides Above Consensus; Raising FVE to $50; Shares Fairly Valued

Match's fourth-quarter results easily beat our internal projections and consensus estimates, as Tinder continues to drive strong double-digit top-line growth for the company, not only by attracting more users but also by more effectively monetizing them. However, further international expansion may not be an easy task, especially given Facebook’s presence. The strong growth in Tinder subscribers continues to support our narrow moat rating, based on the network effect moat source, for Match. While full-year revenue growth guidance was basically in line with our projection, the adjusted EBITDA guidance exceeded our estimate, and we expect further margin expansion in 2019. We adjusted our model accordingly, and after rolling it forward, we increased our fair value estimate of Match Group to $50 per share from $45. The stock is up 5%-plus in reaction to the encouraging fourth-quarter numbers.

Match ended the fourth quarter with total revenue of $457.3 million, up 21% year over year. Total subscription, or direct, revenue grew 22% from last year to $445.1 million. Tinder remains the main driver of such growth, as the paying subscribers of the app grew 40% year over year and 6% sequentially to 4.3 million. Match’s overall subscriber count was up 17% from last year to 8.2 million. Monetization of each subscriber did improve; however, that was also mainly driven by Tinder. Match’s total average revenue per user increased by 4% from last year, but the ARPU of Tinder alone was up 12%. Indirect revenue, or sales of advertisements, declined year over year for the second consecutive quarter, as demand for non-Tinder ad inventory continued to decline. Match’s fourth-quarter operating margin came in at 33%, about 70 basis points below last year’s as the firm continues to invest in additional Tinder features plus some new offerings.

Match remains heavily dependent on Tinder. However, the firm continues to invest in newer products and is focused on expanding internationally. While we expect the commercialization of apps such as Hinge and Ship to accelerate revenue growth again in 2020, we are a bit skeptical regarding some of the international markets. We do think that more users will continue to test Tinder and other dating apps, but monetization of those users internationally will be difficult, in our view, due to differences in cultures and/or less disposable income. For these reasons, we expect growth in monetization to moderate a bit in 2021 and beyond. We note that with new features such as Rivalry Week in the Tinder U and the Swipe Surge, there is still room to generate additional revenue per user from Tinder, but mainly in North America.

Regarding the threat of Facebook, while its entrance into online dating likely threatens Match Group’s market dominance, Match Group, driven mainly by Tinder, can continue to differentiate itself from Facebook in a number of ways. First, Match Group, with its online dating portfolio, which consists of Tinder, Match.com, and OkCupid, has already established itself as the market leader. In our view, the firm has successfully created a network effect for its entire portfolio of services that has become practically mainstream. Second, while a Facebook user’s profile on the dating feature cannot be accessed by friends or family members, some may still feel safer using Match Group’s separate apps, given Facebook’s public platform and its issues with data privacy. Last, Tinder user demographics are slightly different than that of the average Facebook user, and the lower average age of Tinder users could help the app differentiate itself from Facebook. However, we must note Facebook’s presence in the international markets could hinder Match’s efforts to widen its reach in some regions outside of North America.