Grindr: Sex Sells

I’ve written a lot about dating app stocks, which I see as interesting and unique businesses that I may have somewhat of an edge in due to my age. While Match Group has been a long term holding for me, I wanted to look at a different dating app that I actually see as a significantly better business (though at a much higher valuation) in Grindr. I’ve tweeted in the past that I think Grindr is one of the best businesses around, to a lot of confusion and scepticism from other investors. I want to dive into why I think Grindr is such a high quality company, along with my views on it at this valuation.

Let's start off with what Grindr actually does. Grindr markets itself as a gay dating app, though in reality it functions as a gay hookup app. The app is designed very differently from other dating apps, allowing users to message anybody within a certain range instead of relying on matches like apps like Tinder or Bumble. Users can filter for traits such as age, body type, “position” (top, bottom, etc). Additionally, users can pay for access to wider search ranges, no ads (they bombard users with ads with the free version), boosts and various other features.The dynamic on Grindr is very different to other dating apps due to the standards of gay men. Put simply, gay men will screw pretty much anyone, meaning that even less attractive Grindr users get value out of the platform in a way that many of the other dating apps can’t offer.

So why do I think Grindr is such a good business. In my April 2023 post covering the dating app space I wrote “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.” The fact is that people fish where the fish are, and there’s no other apps that come close to Grindr in scale or brand recognition. Grindr has essentially become synonymous with gay sex. Additionally, the gay community is a fantastic demographic to service. Around 11% of Gen Z men identify as LGBT versus just 5% of millennials and 3% of Gen X giving Grindr a rapidly expanding TAM. Additionally queer men have higher median incomes and less children, giving them a huge amount of disposable income relative to the general population.

Some readers would point to other dating apps and their performance as something to be wary of with Grindr, however I don’t believe them to be comparable for a few reasons. The first and most important is that Grindr’s product is actually good. A common criticism of dating app stocks is that if the app and user experience is good, the users leave due to ending up in relationships. In contrast to this, Grindr mainly facilitates casual hookups, and boy are they good at it. Grindr is optimised to get people laid, and the base free app is very effective which actually adds to the case for paid features. Accessing the paid features adds real value here due to the fluidity of gay attraction. Whereas in traditional, heterosexual dynamics people are hesitant to “date down” gay attraction is extremely fluid with regards to things like age, body type, economic status or general attractiveness. This means that having access to these extra tools can be the difference to get the attention of the type of person that someone wants. These dynamics spread out over the many interactions someone will have on Grindr results in a real value add here especially for people of middling or below attractiveness (a value add that is questionable on the other dating apps).

Looking at the financials, Grindr is an obviously brilliant business. Grindr has been consistently growing revenue at around 35% annually for the past few years while keeping operating margins around 20%. Return on invested capital for the last quarter was near 40% as the company needs limited capital to grow. The company does have $300m of debt (against $100m of run rate EBIT), however recently completed a refinancing which significantly reduced interest from above $10m down to $6.5m a quarter. With limited capital requirements it’s fair to assume that they will continue to pay down debt in the short term.

Valuation is a bit complicated due to outstanding warrants, which do inflate the share count higher than face value. The company has 37m warrants with a strike price of $11.5 (currently in the money) along with 176m common shares bringing the company to a true market cap of around $2.85b vs $50m of run rate earnings based on the last quarter. This puts Grindr at a PE of almost 60! While I’m not much of a growth investor, I don’t think this valuation is crazy. The company grew revenues by 10% just in the last quarter, and I believe has a fair amount of operating leverage due to reasonable cost controls and stable interest expenses. It’s not unreasonable to forecast aggressive revenue growth alongside significant margin expansion, which would make the company look a lot more reasonably priced in a year or two. Additionally, I genuinely believe the company has a rock solid moat along with a clear runway to continue growing.

It is very easy to see worlds where the stock does very well from here as they continue to grow at double digit rates for a very long time. Additionally, it’s clear why the opportunity exists, with it being a SPAC, a kind of “sin stock”, and a product that the largely straight finance community has had limited exposure to directly. On the other hand, the company is priced to perfection currently, and has a long way to fall if growth rates were to just decline, let alone stagnate altogether. Additionally, I still have my reservations around management. I found their promotional behaviour around their listing left a sour taste in my mouth, meanwhile CEO George Arison previously founded a company called Shift which, after coming public via SPAC at a valuation of $400m dropped rapidly and eventually filed for bankruptcy in 2023. I currently have a very small holding, mainly as a tracking position. However I do find the valuation to be a bit high for my liking and the margin of safety just isn’t there. If the stock were to fall to a more reasonable valuation if the market sold off or they suffered short term issues I would be very interested in building out a reasonably sized position as I believe it is a very high quality and robust business.