This week's casual valuation is Match Group. It is one of the companies that I've looked into many times and liked the business model and the financials, however, I find it quite expensive. Hence, disclaimer, I do not own any shares of Match Group (Ticker symbol: MTCH)
I hope you enjoy these weekly posts and feel free to add your take as well as agree/disagree with what is mentioned below.
The post is divided into the following sections:
- Introduction
- Historical financial performance
- The balance sheet
- Relevant statistics
- Assumptions & valuation
- Valuation based on assumptions different than mine
Introduction
For those who haven't heard of Match Group, this is a company that owns a portfolio of apps, most of them dating-related. This includes Tinder which brings in 56% of all revenue, but also Match, Meetic, Pairs, OkCupid, Hinge, and many others.
98% of all revenue comes in the form of recurring subscriptions, with the remaining 2% in the form of advertising.
We can translate the recurring subscription revenue into a simple mathematical formula:
# of users multiplied by the Average revenue per user ("ARPU")
Oftentimes, this kind of formula allows me to look at the future growth of the company through different lenses and helps me understand what is the ceiling. I'll come back on this in the segment related to the relevant statistics.
Historical financial performance
If we graph the revenue that Match Group brings, we can see how resilient it is as a company. The revenue kept increasing every year and is up from $1.7 billion back in 2018 to almost $3.2 billion in 2022. There's no visible impact of Covid-19, which means the users do not have dating apps as the first to cancel on their list in challenging times. This doesn't come as a surprise, Maslow had a point with his hierarchy of needs.
During the same period of time, the gross margin decreased from 76% to 70% and the other operating expenses decreased (as % of revenue) from 44% to 42%. This leads to a decrease in Match Group's operating margin from 32% down to 28%, which although sounds bad, is still quite impressive.
What is worth mentioning is that Match Group acquired Hyperconnect back in June 2021 for $1.75b (for comparison, today's market cap of Match Group is roughly $10b). A significant portion of this consideration is on the balance sheet in the form of goodwill and other intangible assets (that are being amortized). Amortization has some influence on decreased profitability, but from a cash point of view, it should not be taken into account. These other intangible assets will be amortized over time and Match Group paid for all of that at the moment of acquisition. There won't be any further investment to replace these assets in the future.
The balance sheet
As expected, this is a fairly capital-light business to run with very little to see on the balance sheet. Almost 2/3rd of the $4.2b assets relate to goodwill and intangible assets. The remaining significant assets are in the form of PPE ($270m) and cash ($580m).
On the other side, they have close to $4b in debt, which can be considered a significant amount comparing it to the company's market cap.
However, as Match Group has been generating $600-700m in FCF, this isn't necessarily worrying and there's not really a risk that the debt brings the company down.
Relevant statistics
I'd like to start this by pointing out the most important formula for the company's growth again:
# of users multiplied by the Average revenue per user ("ARPU")
In order for the company's revenue to grow, this is what needs to increase.
In the investor presentations, the following is disclosed:
- 63% of the US Singles used a dating product in 2022 (up from 39% in 2015)
- The average # of apps used in the US by those who are under the age of 35 is 4.3 (up from 2.2 in 2015)
- 51% of all US singles used a dating product in 2022 (up from 34% in 2015)
Why are these statistics relevant? Because we can see what is the market that has not been captured yet. Of course, it is unreasonable to expect that 100% of the single population is using an app.
For the US, my opinion (and I could be wrong) is that there is little room to grow the # of users.
Let's take a look at the percentages for the different geographical areas (% of that are using a dating product):
Europe: 45%
LATAM: 39%
MENA: 29%
APAC: 22%
Africa: 14%
Here it seems that there's more room for growth, but these are also areas where other dating apps are being used.
In my assumptions, I am expecting that the revenue of the company increases by 52% over the next decade. This is much slower growth compared to the past, and I am basing this on my assumptions that:
- The # of users cannot continue growing at the same pace
- They cannot significantly increase the prices due to competition
Assumptions & valuation
Here are my assumptions that I used to calculate the value of Match Group using a DCF model:
Revenue growth: 5% over the next 5 years, then decreasing over time to 3% (leading to a 52% revenue growth in the next decade)
Operating margin: 28%
Discount rate: 11.06% (WACC-based) decreasing to 9.85% by year 10
Although analysts are forecasting a bit higher growth as well as higher operating margin, I am being conservative as as an investor, I am trying to protect myself from the downside.
After adjusting for the cash/debt on the balance sheet, as well as the equity options outstanding, the value of Match Group is $6.8b ($24.56/share).
For comparison, the company's market cap is $10.3b ($36.9/share).
Based on my assumptions, the return that Match Group offers at today's share price is 7.3%.
Valuation based on assumptions different than mine
Of course, the future is uncertain and my assumptions could be significantly wrong. Let's take a look at how the valuation (per share) changes if we use different assumptions related to the revenue 10 years from now as well as the operating margin.
| Revenue / Operating margin | 26% | 28% | 30% | 32% |
|---|---|---|---|---|
| 25% ($4.0b) | $17.2 | $19.5 | $21.8 | $24.2 |
| 52% ($4.9b) | $21.8 | $24.6 | $27.3 | $30.0 |
| 90% ($6.1b) | $28.3 | $31.5 | $34.8 | $38.1 |
| 125% ($7.2b) | $33.7 | $37.5 | $41.2 | $45.0 |
Overall, I do like the business model, the company has been consistently generating free cash flow, but I am not confident that they can deliver high growth for an extended period of time. In order for the revenue to grow by 125% over the next decade, that translates to annual revenue growth of 8.4%, every single year.
On the other side, there's another factor to consider and that is the resilience of the business. If the market participants are willing to pay a premium for that, then having a higher-than-expected price could be seen as justified.
What are your thoughts?
As always, thank you for reading the post, and until next week for the next valuation!
[link] [comments] https://www.reddit.com/r/stocks/comments/13412i4/match_group_stock_analysis_and_valuation_the/
Login to add comment
Other posts in this group
Please use this thread to discuss your portfolio, learn of other stock tickers, and help out users by giving constructive criticism.
Why quarterly? Public comp
When you sell a stock to buy another stock, do you prefer to set the estimated amount of the capital gains taxes aside in a money market or do you think it better to
Saving for retirement is crucial, but relying solely on a 401(k) might not be enough due to high inflation. Consider investing in growth stocks, especially in the tec
I’m think this is not a good investment as there is no chatter at all on the 52 week low. They are involved in a class action lawsuits by investors and credit card co
Sorry if this is the wrong sub. Let’s say I had $1 million in VOO but I wanted to sell half of it to buy SCHD. It would suck to pay taxes on $500k. So how would you g
Hey guys, I did a deep dive into Crocs. In this analysis, I will do a brief breakdown of the company and go over some quantitative data, qualitative data and estimate
