Match Group: The Dating App Empire You Need To Swipe Right On (NASDAQ:MTCH)

Howdy there, Searching for Alpha readers! At present I wish to discuss an undervalued inventory with a large financial moat that I believe it’s worthwhile to be swiping proper on: Match Group (NASDAQ:MTCH).

About Match Group

In case you’re not aware of Match Group, let me catch you up. They’re the parents behind the wildly widespread courting apps Tinder, Hinge, and Meetic – you already know, the apps which can be liable for numerous awkward first dates and occasional love tales. Match Group has been dominating the net courting area for some time now, they usually’re not slowing down anytime quickly.

The corporate’s courting portfolio consists of 4 out of the highest 5 manufacturers in North America. That is proper, they have extra hits than Ricky Martin (for those who don’t know who Ricky Martin is, ask your dad and mom). And Tinder, their largest app, is probably the most downloaded courting app on this planet. What’s shocking is it’s nonetheless the undisputed king even after introducing monetization options and charging customers in 2015.

Its portfolio just isn’t solely deep, it’s large too. With over 45 totally different courting apps and web sites, Match Group has one thing for everybody.

However Tinder and Hinge are its two mainstays and are seemingly the way forward for the corporate.

Match Group’s government management intends to take a position most of its sources and power into Tinder and Hinge.

Management additionally expects to extend Tinder’s advertising and marketing spend by two share factors in 2023 to reinvigorate the model. Right here’s an excerpt from the corporate’s most up-to-date shareholder letter:

Tinder plans to launch its first-ever international advertising and marketing marketing campaign this quarter. From its inception, Tinder grew quickly via sturdy, natural word-of-mouth, so there was much less of a have to market. Nonetheless, over time, this lack of selling has contributed to a slender model notion that doesn’t rejoice the breadth of relationship prospects Tinder creates daily. By a recent, multi-channel model marketing campaign, Tinder could have the chance to showcase the total vary of what it provides and develop a extra correct model story that resonates with its core viewers. We consider that investing to construct and correctly place Tinder’s model will, over time, assist interact each new and former customers, and cement its place as a premiere international courting app.

[Source: Page 7 of Match Group’s Q4 2023 Shareholder Letter]

Concerning Hinge, Match Group acquired that firm in 2019, after buying a 51% stake within the firm the yr prior. The app is rising quickly and is the second and third hottest courting app in lots of important nations around the globe:

Right here’s what the corporate stated about Hinge in its most up-to-date shareholder letter:

Hinge® continues to be the brightest spot in our portfolio and a essential contributor to Match Group’s development, pushed by ongoing power in its core English-speaking markets and its burgeoning reputation throughout newly launched European markets. Justin McLeod, founder and CEO of Hinge, will now report on to BK [Bernhard Kim, CEO]. Justin’s founder-led artistic imaginative and prescient and guiding ideas will stay entrance and middle for Hinge because it continues its international enlargement and grows into an much more important a part of our portfolio.

[Source: Page 4 of Match Group’s Q4 2023 Shareholder Letter]

Now, let’s check out Match Group’s aggressive benefits and its dangers and challenges.

Aggressive Benefits

So, what makes Match Group so particular? Effectively, for starters, they’ve a large financial moat. That is fancy investor lingo for “they’re actually good at defending their turf.”

Match Group’s financial moat is primarily rooted in what are generally known as “community results.” The extra individuals who use Match Group’s companies, the extra beneficial these companies change into for each consumer. It is like the alternative of a pyramid scheme. Permit me to elucidate:

Match Group’s courting apps are mainly the cool children’ desk of the net courting world. They have tens of millions of customers (over 16 million paid customers as of This fall 2022 and plenty of extra free customers), making it more durable for brand spanking new opponents to interrupt in. It is like attempting to hitch a clique in highschool – good luck for those who’re not already in. And the extra individuals who be a part of Match Group’s apps, the extra beneficial they change into to current customers, creating a gorgeous cycle that offers Match Group a severe benefit over new entrants.

It is the basic hen and egg drawback. As a result of let’s face it, no one desires to hitch an empty courting app. The entire level is to have choices, folks! So, if somebody is on the lookout for love (or simply some informal swiping), utilizing one in all Match Group’s widespread apps is an apparent alternative (even when it prices the consumer a bit of cash).

In addition to community results, Match Group additionally has an “economies of scale” factor going for it. Match Group has created a portfolio of apps and web sites that appeal to people at totally different phases of their lives when looking for relationships. For instance, youthful customers looking for informal relationships are drawn to Tinder, whereas older customers on the lookout for extra of a long-term relationship would use Match Group’s very long time market chief, Match.com. And with over 500 million single adults in North America, Western Europe, and different vital areas of the world, that is plenty of potential clients.

After all, Match Group is not with out its opponents. However with its broad model portfolio and community impact, I believe the corporate will keep its aggressive benefit. And who is aware of, possibly they will even escape into adjoining markets and begin providing matchmaking companies for canines!

Dangers and Challenges

No funding comes with out dangers. Listed below are the highest three dangers I see.

First up, we have got the basic drawback of provide and demand. As Match Group makes it simpler for folks to search out love, they should spend more cash to market to and purchase new clients. It is like attempting to replenish a swimming pool with a leaky hose. Certain, you make progress, however you are additionally losing plenty of water (and cash). This might end in elevated bills required to market to and purchase new clients and finally depress margins—one thing Wall Road is already involved about given Match Group’s current monetary efficiency.

Then there’s the difficulty of cannibalization. With so many various manufacturers and companies, there’s all the time the danger that one will eat into the market share of one other. It is like a courting Starvation Video games, with totally different apps combating for survival. And let’s be actual, no one desires to be the primary one voted off the island. Will Hinge infringe on Tinder’s turf? It could be too early to inform and a few buyers usually are not ready to search out out.

However maybe the largest danger of all is pricing. Certain, Match Group has a community impact that is stronger than a shot of espresso, however that does not imply they’re invincible. Rivals like Bumble, eHarmony, and Spark Networks are nipping at their heels, and will try to compete on worth and even provide their platforms totally free, thereby miserable margins for the whole trade. Match Group might want to proceed innovating to enhance the courting expertise and keep one step forward of opponents.

So there you may have it, of us. Match Group’s love empire could also be sturdy, nevertheless it’s not invincible. They have some dangers to deal with, however I consider they’ll overcome them. In spite of everything, love conquers all, proper?

Valuation

I believe Match Group is undervalued. As of the date of this writing, the inventory is buying and selling for $37.61 per share. I used one in all my favourite web sites, Finbox, to assist me construct a DCF mannequin primarily based largely on analyst projections. I consider Match Group is pretty valued at about $52 per share, that means I see about 32% upside. Right here’s a fast abstract of my mannequin:

The desk beneath exhibits projected free money flows to the agency (FCF) annually (each nominal and discounted). The mannequin assumes that Match Group will generate over $1 billion of FCF this yr—these are money flows obtainable to each debt and fairness stakeholders.

Now, Match Group has $581 million of money within the financial institution and practically $4 billion in debt, so we have to translate the truthful worth of the whole enterprise to the truthful worth of a single share of fairness. The desk beneath exhibits the calculations.

You may see the total DCF mannequin right here.

On the earnings entrance, analysts estimate that Match Group will generate $2.75 per share in earnings this yr and $3.12 subsequent yr. This equates to a 2023 and 2024 price-to-earnings (P/E) ratio of 13.7x and 12.0x, respectively. This might in flip be an earnings yield (the reciprocal of P/E) of seven.3% and eight.3%, respectively. With 10 yr treasury charge at about 3.5%, this can be a premium of 4 to 4.5%.

Technical Setup

Match Group’s inventory is at the moment buying and selling at $37.61, which is close to its 52-week low of $34.62. It’s unclear whether or not the underside is in, however the inventory is more likely to discover some assist at these current lows. Nevertheless it doesn’t imply it will probably’t go even decrease. And, frankly, this chart just isn’t trying very bullish. That stated, I don’t anticipate the inventory to make any main strikes (up or down) till after the corporate studies earnings on Might 2nd.

A Conservative Option to Generate Revenue from Match Group Utilizing Choices

For all you savvy buyers on the market, let’s discuss choices. Particularly, let’s discuss two choices methods: (1) lined calls and (2) artificial lined calls (typically known as poor man’s lined calls, which appears like a tragic try at a superhero title).

Coated Calls

Let’s begin with lined calls. A lined name is an choices buying and selling technique the place an investor who owns 100 shares of inventory sells a name choice on that very same inventory. This enables the investor to earn earnings from the premium acquired from promoting the decision choice, whereas additionally limiting potential losses if the inventory worth had been to lower.

I like to check lined calls to working a short-term rental companies like Airbnb (ABNB) or Turo (TURO), however as an alternative of accumulating rents on trip houses and sports activities vehicles we’re accumulating rents on shares. Permit me to elaborate —

While you placed on a lined name commerce, by mainly “leasing” your upside within the underlying inventory (above a sure degree) to Mr. Marketplace for a specified time period (say 30 days). The time worth portion of the choice premium you gather from Mr. Market is rather like rental earnings. It doesn’t matter what occurs to the underlying inventory worth (whether or not up, down, or sideways), you get to maintain that price. In case you promote an at-the-money (ATM) or out-of-the-money (OTM) choice, the whole premium is time worth and can decay over the lifetime of the choice. I consider the choice premium collected from Mr. Market from the sale of this 30-day choice as my month-to-month hire examine.

So, how would I play Match Group in a considerably conservative method earlier than earnings on Might 2nd. As of the date of this writing, I might think about doing the next since I consider the draw back in MTCH inventory is restricted:

(1) Purchase 100 shares of MTCH inventory for $37.55 per share for a value of $3,755.

(2) Promote the $38 strike name choice expiring on April 28, 2023 for $195.

The entire web value to place this commerce on could be $3,560.

Right here’s the revenue loss diagram:

As you’ll be able to see, if MTCH is buying and selling at the very same worth as the unique buy worth ($35.61) when the decision choice expires on April 28, 2023, you’ll have a revenue of $195 per share in 28 days. That’s since you get to maintain the $195 of choice premium you collected from Mr. Market while you leased him your upside within the inventory above $38 per share. That is your hire. It’s yours to maintain it it doesn’t matter what.

If the inventory worth is at or above $38 per share when the decision choice expires on April 28, 2023, you’ll have a revenue of $240 per share in 28 days. This revenue is comprised of $195 from promoting the near-dated choice to Mr. Market and $45 from worth appreciation in your 100 shares of MTCH (from $37.55 to $38.00 is $0.45 per revenue per share x 100 =$45). It is a return of 6.7% on capital in danger in 28 days or 88% annualized. Not too shabby.

And even when the inventory worth has dropped barely when the decision choice expires on April 28, 2023, the commerce will nonetheless be worthwhile. In actual fact, by my calculation, the commerce gained’t go detrimental till the inventory worth has dropped beneath $35.60 per share. It’s because the $195 of hire is offsetting losses on the 100 shares as the value decreases till all $195 of hire has been exhausted.

Artificial Coated Calls

Now, what if we might get even higher returns than the lined name technique whereas risking even much less total? Let’s discuss artificial lined calls. Right here’s the cool factor –

As an alternative of shopping for 100 shares of MTCH, I might purchase a long-dated, deep-in-the-money name choice with an 85+ delta. With out getting too within the weeds, delta tells us that the choice will present upside and draw back publicity just like X variety of shares of the underlying inventory the place X is delta. So, if we had been to purchase a name choice with an 85 delta, each $1 enhance within the underlying inventory worth will enhance the choice’s worth by roughly $85. Equally, each $1 lower within the underlying inventory worth will lower the choice’s worth by roughly $85. This implies shopping for an 85 delta name choice is just like shopping for 85 shares. However the true kicker is that it prices much less to purchase an 85 delta name choice (even a long-dated one) than it does to purchase 85 shares of the underlying inventory.

Taking a look at MTCH for instance, I might purchase a $25 strike name choice expiring on January 19, 2024 (virtually 300 days from now) for $1,530. I’ll name this name choice my “LEAPS Possibility” (the time period “LEAPS” is only a fancy title for long-dated choices). This explicit LEAPS Possibility has a optimistic delta of 87, that means it provides me roughly 87 shares price of lengthy publicity to MTCH inventory. If I had been to purchase 87 shares as an alternative of the choice, I would wish to spend $3,266.85 ($37.55 * 87). That’s greater than double the associated fee.

I might then do the identical factor as within the lined name instance above and promote the $38 strike name choice expiring on April 28, 2023 for $195. However by shopping for the LEAPS Possibility as an alternative of 100 shares, I’m primarily creating an artificial lined name (this appears like one thing out of a sci-fi film). My web value for this artificial lined name is $1,335 ($1,530 paid for the $25 strike LEAPS choice much less $195 collected from promoting the near-dated $38 strike name choice).

My revenue/loss diagram for this artificial lined name would look one thing like this:

As you’ll be able to see, if MTCH is buying and selling at $38 per share when the near-dated name choice expires on April 28, 2023, you’ll have a revenue of about $200 per share in 28 days. This revenue is comprised of $195 from promoting the near-dated choice to Mr. Market and a bit little bit of revenue from worth appreciation within the LEAPS Possibility offset considerably by time decay on the LEAPS Possibility (there’s about $1 per day of time decay on the LEAPS Possibility). That’s a possible return of 15% on capital in danger (the $1335 paid for this place) in 28 days, or 195% annualized. Once more, not too shabby.

As an apart, you might be noticing the slight downward droop in income as the value will increase above $38 per share. This is because of the truth that the LEAPS Possibility has 87 shares price of lengthy publicity as an alternative of 100 shares price within the lined name instance. So, because the underlying inventory worth will increase, the near-dated brief name choice is creating losses barely sooner than the LEAPS Possibility is creating beneficial properties (technically your LEAPS Possibility is growing in delta because the underlying inventory worth will increase, however not quick sufficient to maintain tempo with the near-dated brief name choice).

One straightforward solution to treatment this slight drop in income as the value will increase, is to purchase 10 shares of MTCH when opening the artificial lined name commerce. This offers an extra 10 shares of lengthy publicity and bumps the delta of your lengthy place to 97 from 87.

So, there you may have it, of us. Choices could appear scary, however they could be a conservative solution to make some money. And for those who’re feeling adventurous, you might wish to give artificial lined calls a strive. However my suggestion is to not double the variety of artificial lined calls simply because they’re cheaper. That’s a fast solution to get your self into hassle. Take the financial savings and maintain it for a wet day.

Conclusion

Effectively, nicely, nicely, look who’s made it to the tip of this inventory evaluation extravaganza! Give your self a spherical of applause, my buddy. To sum issues, I believe Match Group inventory is a sexy long-term funding at present costs. Certain, Match Group is going through some challenges and will have to spend more cash to draw new customers, however they have a large financial moat and a portfolio of courting apps that is extra numerous than a field of sweets. Given my view of restricted draw back, I’m additionally a pair methods to generate earnings from Match Group within the close to time period utilizing choices. So, for those who’re on the lookout for a inventory to swipe proper on, Match Group may simply be the one for you.