A Look at Dating App Stocks

From a chronically single zoomer

I like to look for ideas where I may potentially have some sort of edge. The most obvious area for this is my age and my use of various companies' products such as Snapchat, Hasbro and Fever Tree. For this entry I want to take a look at the major dating app companies: Match, Bumble and Grindr. I feel like a lot of investors often invest in companies without having used or even really understanding their products. With that view I wanted to illuminate some of the key differences between the dating apps from a user perspective and how that relates to how I perceive their value.

Firstly, some comments on dating apps in general. The tailwinds for dating apps are obvious. While the apps have likely reached close to full market penetration, the younger generation have increasing levels of comfort with meeting people online. Due to this dating apps will continue to grow steadily as demographics shift. Furthermore, all the data is showing that loneliness is becoming an increasing issue in the developed world while basic social skills and interactions are in decline. While this is sad for society, this is just beneficial to dating app market growth as people become increasingly dependent on them. Finally many people argue that they can’t be good products because if they worked then people wouldn’t have to use them anymore. Firstly, many people use dating apps purely for casual interactions. Furthermore, relationships are a product for dating apps, and like any product they generally expire after a period of time. The majority of people who have success on dating apps will still have to return in 6 months or a year or 2 years or whenever they break  up with a partner. Thos who don’t will be replaced by plenty more who try them for the first time.

Match

Match is the big dating app stock, with Tinder, Hinge and various other legacy and developing apps. I’m going to focus on Tinder and Hinge as those are both the only apps I’ve used and also the two core drivers of the companies long term prospects. Tinder is the largest dating app in the world by both users and revenue. Tinder’s benefits from the network effects that come with scale, along with the moat that comes with being the name brand in dating apps. Tinder’s growth has stalled this year, however this is lapping strong growth in 2020 and 2021 partially driven by Covid. Long term trends around digitisation, demographics and loneliness will continue to drive steady user growth. As the largest app here, Tinder probably has the least room to grow out of those listed and will grow with the market as opposed to carving out new niches or taking market share. Hinge is one of the fastest growing dating apps in the world, and what I believe to be the most interesting part of the Match story. Hinge competes with Bumble by focusing on higher quality matches and has many small differences that make a big impact. For example, requiring users to press two buttons to like as opposed to swiping forces users to put more thought into likes (average users spent .3s per swipe). Another feature is allowing users to send messages with their likes and like specific photos or prompts, which allows users personality to shine through. Subjectively, everybody that I know who uses dating apps uses Hinge, some as their only dating app. Furthermore, all of them consider it their favourite of the dating apps. Hinge has a fantastic user experience and it makes sense that it’s the fastest growing dating app on the market. At around 13 times normalised earnings, with a market leader in Tinder and rapid grower in Hinge Match looks incredibly cheap. Disclosure, Match is the only one of these that I own.

Bumble

Bumble markets itself as a more civil alternative to Tinder. Their key feature is requiring Women to message first, while their entire UI is set up to encourage more detailed profiles and higher quality interactions. This clearly sets them apart from their key competitor Tinder, and while tinder’s growth has slowed Bumble has continued to grow revenue at 20%. While their growth is still very strong, I have some concerns about their long term role in the space. The first thing to note is that Bumble’s margins are considerably worse than Match. Bumble is barely profitable (with about $80m operating income), and spends 28% of revenue on marketing instead of 16% from Match. Anecdotally, while Bumble has done a good job at providing an alternative to Tinder, Hinge seems to be doing a better job. Hinge excels at creating higher quality matches, which was Bumble’s whole selling point. It’s telling that recent Bumble updates have basically copied Hinge’s UI and some of its key features. Tinder will always benefit from being the name brand and having benefits of scale while Hinge is undoubtedly the best product on the market right now, which potentially leaves Bumble in an awkward spot sandwiched in the middle. At around 80 times my estimate of normalised earnings, Bumble is priced to perfection. I don’t see it having the moat of dominant competitive position of any of the other apps here and am sceptical of its ability to live up to that valuation.

Grindr kind of operates in its own little niche as basically a gay hookup app. While various genders and types of people exist on Grindr looking for various different interactions, Grindr knows what it is and it fills that role perfectly. Everybody who’s on Grindr knows exactly what everybody else on Grindr is looking for. The user interface for Grindr is very different to other dating apps, having hookup orientated features such allowing you to message people out of the blue (instead of matching) and store albums of spicier photos you may not want on your profile. The ads on Grindr often feel much more relevant and specific to the userbase than the other apps which have very generic advertising. I’m of the opinion Grindr’s competitive position is essentially untouchable, with the combination of brand recognition and network effects allowing them to dominate their niche. While benefiting from the obvious tailwinds of the other dating apps, Grindr also benefits from the increase of people identifying as queer, with that number doubling in the US over the past decade. On the back of this Grindr has grown the top line at above 30% in the last two years while generating a consistent operating profit. The company currently trades at around 50 times my estimate of normalised earnings, which feels reasonable considering their strong competitive position and long runway for growth.

However, Grindr went public late 2022 in a Spac transaction which in itself is a red flag. Due to high amounts of redemptions, the SPAC contributed very little actual capital to the company (only around $300m), however have contributed 37 million 5 year warrants at $11 and $18 expiry’s. Additionally, within the complexity of this deal the company added $230m of high interest (approx 9%) debt despite being profitable partially due to a $196m distribution that I can’t find any further information on in the filings. Finally due to the high amount of redemptions the public float is incredibly small which lead to a ridiculous short squeeze upon ipo, increasing in price 250%. Management certainly fed into this with their promotion in the lead up and following going public and many naive, especially queer retail investors got caught holding the bag. While none of this takes away from the actual business, the whole story of how they went public stinks and makes me concerned about both management and the controlling shareholders.