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Morningstar | Tinder Continues to Swipe Above and Beyond Most Expectations; Maintaining $50 FVE; Shares Overvalued

Match Group reported first-quarter results with revenue exceeding consensus but coming in slightly below our internal projection. On the bottom line, the firm beat all expectations. Double-digit revenue growth was again driven by strength in Tinder, partially offset by continuing weakness in the firm’s other apps. While Tinder remains the only effective app within Match’s portfolio, the firm is now focused on expanding its presence into the Asia Pacific region, which bodes well for top-line growth in the long-run but requires further investments in the short-term. Management provided second-quarter and full-year guidance in line with our estimates. With minimal adjustments to the model, we are maintaining our $50 fair value estimate on Match Group. While growth in Tinder subscribers and slight increase in revenue generated per user display Match’s network effect moat source, we believe this narrow-moat and high uncertainty rated name is overvalued.

Match’s total revenue of $464.6 million was up 14% year over year as Tinder subs grew 36% to 4.7 million. The firm’s paid member user count grew 16% from last year to 8.6 million. We estimate that monetization of Tinder users increased 1.7% to $0.54, although we are now seeing significant deceleration in such average revenue per user, or ARPU. Excluding headwinds from foreign currency, growth in ARPU would have been in only mid-single digits, still significantly below the 20%-40% growth the firm experienced the last two years, signaling declining impact of Tinder Gold, which was first launched in second half of 2017. Solid growth in Tinder paid users was partially offset by decline in paid users of other apps. Subscribers of non-Tinder apps declined for the ninth consecutive quarter by 2% year over year to around 3.9 million.

It appears that non-Tinder subscribers are performing a bit better as we estimate that their ARPU was up 0.8% from last year to slightly above $0.64. While Match Group is working on redesigning the Match.com app, we believe that growth in Tinder may be cannibalizing growth in other apps. While most apps under the Match Group umbrella are designed to target different types of singles, we think the young singles across all genders and sexual orientations, across many geographic locations, and with short- and long-term objectives, may be favoring Tinder over other Match Group apps.

Lack of user growth in non-Tinder apps also hit indirect revenue from those apps, as ad revenue declined 27% from last year to $10.7 million. Ad revenue has continued to decline as a percentage of total revenue for three straight years. While sales of ads represent only between 2% and 3% of total revenue, their decline is another cost brought forth to the non-Tinder apps by continuing growth in Tinder. Plus, with Facebook now in the dating app scene, the social network giant could become the advertisers’ first choice.

In the meantime, Match Group is working on more recent apps, including Hinge, BLK (for black singles), Chispa (for Latina singles), and Ship (for hooking up users’ friends). While the firm is likely to aggressively invest in enhancing those apps and in acquiring users, the monetization of the users, especially Hinge, is at least one year away. Like what we have seen with Match.com, the success of the new apps could come at a slight cost to Tinder and its subscriber and monetization growth.

Until then, the firm will continue to market Tinder and other apps in many regions, especially the Asia Pacific. Based on data provided by management, we estimate that Tinder could drive average annual revenue growth of around 55% in that region during the next five years. By 2023, Match Group expects that revenue to account for 25% of its total revenue, which we currently estimate to be $3.3 billion. The market is an attractive one with approximately 300 million singles, equivalent to four times singles in North America, according to Match Group management. While we expect the firm to increase its user base at double-digit rates during the next five years, we are a bit more cautious regarding the monetization of those users, especially as the international ones begin to represent more than half of the total likely by the end of this year.

Match’s GAAP operating margin of 25.6% was lower than last year’s 27.6% as stock-based compensation jumped during the quarter due to the vesting of various awards at Tinder. The firm did benefit from lower sales and marketing expenses as a percentage of revenue as acquisition cost of Tinder subscribers appears to be declining, which supports what we view as the network effect moat source for the company. However, the firm plans to increase those expenses during the second half of this year as it focuses more on expanding into additional markets and increasing user base of its newer apps. We still expect slight margin expansion in 2019 driven by top-line growth and some cost control on G&A.