The Match Thesis from a Zoomer

Hinging on Hinge

The Match Thesis from a Zoomer

Firstly, hello. Over the past year and a half of doing this I have made it a goal to post an article once a month. Unfortunately last month between travelling, my social life and a lot of overtime at work I wasn’t able to find the time to write anything to the standard I would like. However, I’m back now and to make up for it I’ve got a doozy. A company that is the topic of many of my tweets and the majority of my dm’s I figured I should get around to doing a proper writeup of it. Welcome to the Match thesis from a zoomer.

For the purposes of this article I’m going to assume you have a basic understanding of Match Group, the owners of popular dating apps Tinder and Hinge. If not there are plenty of write ups you can peruse to get up to speed such as this one from Bristlemoon Research. If you follow me on Twitter, you know I'm pretty vocal about Match Group, a company I have been very outspoken about over the past year. While I’m cautiously bullish, my frustration has more been around the general discourse surrounding the stock, which I think has been very poor both on the long and short side. I believe Match, similarly to a stock like Snapchat which I have been vocally bearish over the past year, suffers from a disconnect between a predominantly older investor class with a product predominantly used by young people. This leads to a poor understanding of the product, industry and trends and a generally poor conversation around the stock as a whole. I have been a user of dating apps since I was 18 and am what some would call a man whore. Additionally I like to think I’ve at least somewhat got my finger on the pulse of my generation’s habits, at least as much as someone who writes about stocks for fun can. I want to go into detail on my thoughts around the company as someone who is a shareholder and user of their and their competitors products. This writeup is probably going to be a bit less structured than my others with a more qualitative focus on the areas I believe are being missed by the general discourse.

I wanted to start by going into why I find dating apps an attractive business. One of the most common criticisms I see of the dating app business is low switching costs and it’s true, there is nothing stopping users from moving from one product to another. However, it's important to note that the dating app space is essentially a duopoly, with the only 3 major apps in the space being Tinder, Hinge (both owned by Match) and Bumble. Additionally, most of the smaller apps such as Match.com, Plenty of Fish and Badoo are owned by one of the two major companies. Grindr is essentially the only app in the space that isn’t and it operates in its own separate niche. This dynamic negates the low switching costs as the fact is that users have nowhere to go. While Match still has to compete with Bumble which has stolen market share, the whole market has continued to grow, while Hinge has recently come in and started taking significant market share back for Match.

The common follow up from that is the question “what’s to stop another player coming in and competing”? Sceptics will often point to the amount of movement there has been within the space historically, with companies like Eharmony, Match and OkCupid all occupying the top spots at times over the past decade and Hinge rising to prominence in just the last few years. However, much of this movement happened during the first half of the decade as online dating was a young, dynamic industry. As the industry has matured to what it is today the pieces have stopped shifting and the natural barriers to entry have risen up. The fact is that people fish where the fish are, meaning that the incumbents have significant network effect advantages in the same way that social networks do. Additionally, the existing apps already have reputations and huge name brands that would need to be replicated by obscene marketing spend to even be competitive.

The two best examples of this are Facebook and Hinge. Many people argue that Facebook has both the money and the network to potentially challenge the incumbents while Hinge’s more recent rise is proof that the incumbents can still be challenged. Unfortunately both of these arguments just enforce the impenetrability of these companies' moats. Facebook actually attempted to enter the dating space with ‘Facebook Dating’ launched in 2020 (which should have been optimum timing as the pandemic accelerated online dating trends). 4 years later and Facebook dating is basically irrelevant. On the other hand, while it is true that Hinge has successfully penetrated the market, it’s crucial to note that Hinge was on the verge of bankruptcy at the point when it was acquired by Match Group in 2018 and would have gone under otherwise. Not only do these companies have a huge moat, but it’s a moat that has been tested and has emerged hardly scathed.

While the competitive landscape is favourable, what about the actual products themselves? I hear two main critiques about dating apps as a product. First is that they are a terrible user experience and bad for society and second and more common is that they are a bad product because the more successful they are the less people need to use them. Let's start with the first point, which is true to an extent. Dating apps can be depressing, soul crushing experiences with women struggling to find decent quality matches amongst a sea of underwhelming prospects while men struggle to get matches at all. These apps reinforce harmful insecurities by cheapening the dating experience to picture and a swipe. In spite of this, their popularity continues to grow. We all know that the last decade has seen a huge growth in loneliness at the same time as a decline in social skills. It’s sad but in a world where we are going out less, interacting with less people and lacking the social skills to judge a person’s interest and then chat them up, dating apps are the obvious solution to dating. The fact that everybody complains about the user experiences but continues to use them is a sign of a sticky product. I would add that I do believe Hinge has actually managed to mitigate some of the issues with the user experience faced by Tinder and Bumble and is providing a notably better experience, but I will get onto that later.

Another of the most common criticisms of dating apps as a product is that the more successful they are, the less people are likely to use them. This is true at face value. If users go on successful dates they might end up in a relationship and stop using the app possibly forever. However, I don’t believe this is a significant issue. The fact is that the majority of relationships don’t last, and most users will go on many dates between relationships. In this way I believe it’s more appropriate to think about relationships as part of the product cycle. Nobody criticises Apple because once people buy an Iphone they don’t upgrade again for a few years. The only thing they care about is that they come back to Apple when they want a new phone. While there will always be users who will never come back, the majority of users will be back on the dating apps eventually and when they do they will be using the app that they found most effective previously. Meanwhile there’s a constant stream of new users hitting the dating market each year. As people cycle out of the dating market, people cycle in.

I wanted to add on top of all this that every few months there seems to be some news piece about the “death of dating apps”. I’ve noticed this especially in the last few months with the poor performance of Tinder and Bumble stock. Oftentimes young Gen Z’ers are quoted complaining about the dating app experience, and the articles discuss the alternatives they’re turning to like speed dating, AI girlfriends, abstinence and Roblox. Put simply, these articles are sensationalist nonsense. The bulk of the information presented is anecdotal, and when actual data is presented it’s either data demonstrating frustration/fatigue in dating apps (which is totally to be expected for the reasons presented above) or a look at the company stock prices which have fallen significantly (which are mainly due to overvaluation, as Match and Bumble have consistently grown revenues and users during this time). While the huge growth of the 2010’s may be over, none of them present data that actually suggests dating apps are declining in popularity and usage, at least going back 3 pages of google search results I looked at.

The next question is why Match? The most obvious factor is valuation, with Match trading at a significant discount to its peers such as Bumble and Grindr. We’ll break down the valuation later on but valuation alone does not make a good thesis. While most analysts focus on Tinder payers as the core driver, I believe in the long term the driver of Match’s returns will be Hinge, which I believe has cracked the secret sauce for dating apps and could realistically become the dominant player within the space. Consistently I see Hinge being ignored or dismissed by analysts, with even the most bullish Match commentators focusing on a return to payer growth. Personally, I lean fairly neutral on what happens to Tinder, my conviction comes from the fact that I believe Hinge is a truly special product that will dominate the space long term.

This is where I believe I have an edge over the majority of analysts, many of whom haven’t even used Tinder, let alone Hinge which according to Pew Research isn’t used outside of the 18-29 age range, and also performs poorly in straight and white demographics (ruling out much of the finance industry). I am personally of the opinion that Hinge is by far the best dating app and it’s not even close, an opinion shared by every single person I polled anecdotally about this. It’s hard to quantify exactly why Hinge is so much better, as it’s the culmination of many small things that lead to an overall better experience. I’m going to try my best to give you an idea of some of the differences.

For starters, the UI is very different. While Tinder has a profile photo with a short bio, Hinge has a fantastic, sleek design that emphasises “prompts”:questions and answers that show off the users personality. This has been such a popular feature that Bumble has essentially copied the layout of profiles from Hinge now. Additionally, when liking a profile users are able to send a message with their like and respond to a specific prompt, allowing a pickup line or comment on a shared interest to differentiate yourself. Another difference is the amount of likes, with Tinder users getting 50, Bumble users getting 25 and Hinge users getting a measly 8 likes per day. While this seems like it would detract from the Hinge user experience, it actually fixes a key problem in dating apps of men liking too liberally. By restricting the number of likes to such an extent it forces male users to be more selective with their likes and leads to higher quality matches on both sides. The last thing I’ll touch on is the algorithm. This is purely anecdotal but everyone that I’ve talked to believes the Hinge algorithm is far more effective than both the Tinder and Bumble algorithms, myself included. There are lots of other small differences, but the overall focus is on generating higher quality matches, which most people agree that it does.

This user experience is reflected in the metrics as well. Hinge is growing incredibly quickly, with 33% annual user growth while raising RPP (revenue per payer) to $28, now equal with Bumble and significantly higher than Tinder. Hinge is in the top 3 largest dating apps in most of its markets, while topping out the charts in its more mature markets like the Nordics, the UK and my very own Australia. Hinge does especially well in younger markets, being almost non-existent in the US for over 30’s while also doing especially well amongst racial and sexual minorities.

Back in April when writing about the overall dating app space I wrote about how Bumble was in an awkward spot between its two competitors and struggling to establish its identity. I believe this is just as true today with rumours Bumble is considering axing their iconic women message first rule amongst slowing revenue growth. Bumble’s  lack of identity is apparent, essentially copying Hinge’s look and features but uglier and worse. With their founder stepping down as CEO in November there seems to be a general lack of direction that provides an opportunity for Match Group to take market share with Hinge. Overall I believe that Hinge will likely overtake Bumble and Tinder to become the dominant dating app in the next 10 years and likely be the core driver of returns for Match stock going forward.

So what about Tinder then. Much has been made about the demise of Tinder and it’s true that Tinder payers have been weak. This isn’t totally unexpected or without reason. Management has been aggressively increasing pricing over the past year to bring it to a more optimum level and this has been reflected in the fact that Tinder total revenue has grown significantly in spite of this. However the trend of declining payers began before the pricing initiatives were brought in and the last quarter saw a significant drop so the question is can Tinder stabilise? I’m personally of the belief that they can. Tinder is still the name brand within the space and has by far the largest user base (fish where the fish are). The past 2 years has seen a combination of weak macro and price optimisations along with tough pandemic comps. Most notably along with this has been a decline in both the marketing and user experience of Tinder relative to the other apps that has seen Tinder lose share to Hinge and Bumble.

Management has recognised this and has laid out tangible strategies for improving both such as targeting gen Z, improving the user interface and bios, improving the algorithm and reducing bots. This last one is especially notable as bots on Tinder became incredibly frustrating at times last year, while recently there has been a notable reduction in bot activity. These are simple changes which will go a long way to improving the user experience and bringing Tinder back in line with its peers. With these changes and a stabilisation of the macro environment and pricing I believe that in the next year or so payers will stabilise. In the long term I don’t see Tinder taking a huge amount more market share. However, steady demographic growth combined with inflation could conservatively provide mid single digits growth over the long term assuming no major issues.

As far as the other brands I don’t have especially strong opinions. Evergreen and Emerging brands will likely continue a slow terminal decline as brands like Match and OkCupid continue to phase out of relevancy. I don’t have any expectations for their emerging brands such as The League and Archer, their Grindr competitor. Similarly I don’t have any strong opinions about Match Group Asia and hope that they can just continue to stay stable. There is optionality there as Asia is a large, underpenetrated market however I won’t be holding my breath. Overall these brands will be headwinds in the companies growth, however as Evergreen brands continue to decline and Hinge continues to grow they will get progressively less relevant to the performance of the company.

Before we go over the financials I just want to touch on my biggest concern, management. Match Group has had 3 CEO’s since listing in 2019 and a large amount of management turnover in general. The company’s attempt to move into the metaverse and more general social interactions in 2021 was a disaster, though the drivers of that move are no longer at the company. Bernard Kim, the current CEO was formerly president of video game company Zynga which owned apps like Farmville and Words with Friends. While his track record with Zynga is very good, concerns have been raised around his understanding of the business and whether his mobile game mentality carries over to dating apps effectively. Additionally, he has been criticised for poor communication, with his recent quarterly earnings call earning a lot of heat.. Some things I would note about management generally. Firstly, they are aligned with shareholders and have been recently buying stock as the stock price has dropped over the past year. Secondly, I am very happy with their decision to buy back stock aggressively over the past year at what I see as attractive levels. Finally, their recent rhetoric is aligned with what I’m looking for in the company strategy wise especially around what they need to work on (Tinder improvements discussed above) and their strategy moving forward: investing in their core products, returning capital and not expanding for the sake of expanding. While I don’t have any strong positive opinions about management, I am happy to give them the benefit of the doubt for now.

Considering all of this I believe Match group is at an attractive valuation assuming they can continue to grow steadily over the long term. Based on the last quarter my rough estimate of underlying run rate earnings is $760m, though that may dip next year if payers continue to decline. At a market cap of $9.3b this puts Match at a P/E of 12, which I believe is quite reasonable for a company that expects to steadily grow in perpetuity. While the company does have $4b in debt, this debt is at reasonable sub 5% fixed interest rates. Instead of paying down debt the company has been aggressively buying back stock, with a $1b buyback currently in play after already buying back $1b of stock in the past 2 years (admittedly against $430m of expensed stock based compensation). Management has shown that they are willing to aggressively repurchase stock which at these sorts of valuations I believe is a very effective use of capital.

While I don’t think DCF’s are a particularly effective method of valuing a company, we can plug in some rough numbers to get an idea of what is baked into the price. For example, if I were to assume no growth this year, 5% growth for the next 10 years and 2% growth in perpetuity (which I believe is very conservative) we get to an 11.5% irr. I believe this is a scenario we can be fairly comfortable with. Meanwhile, in the scenario where growth resumes and we move up to 10% and 4% 10 year and terminal growth we get an impressive 15% irr which I believe to be a more likely scenario. While there are a variety of different potential outcomes better and worse than these, it’s clear that the market is pricing Match as ex growth when in reality it has a fast growing asset in Hinge and a reasonable chance at turning Tinder around. Even if the company were to stagnate, at a 12 PE the company doesn’t have huge downside.

A key question I like to ask myself when thinking about stocks is “why does this opportunity exist?” In this case there is a simple answer and it comes down to a disconnect between the investing class and the dating app space. As always there are risks around oversaturation, the declining customer experience and management however I believe investors are well compensated for that risk.The issues Tinder are facing are real and its days of double digit growth may be over, however with the growth and potential dominance of Hinge it may not even matter. Contrary to popular opinion dating apps are attractive businesses with large moats and low capital requirements and we are getting the opportunity to invest at peak pessimism. Obviously come to your own conclusion and please do your own due diligence, but I find the setup for Match Group to be very attractive and own a large amount.