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

Hiya there, In search of Alpha readers! In the present day I wish to speak about an undervalued inventory with a large financial moat that I feel it’s essential to be swiping proper on: Match Group (NASDAQ:MTCH).

About Match Group

In the event you’re not conversant in Match Group, let me catch you up. They’re the parents behind the wildly common courting apps Tinder, Hinge, and Meetic – , the apps which can be chargeable for numerous awkward first dates and occasional love tales. Match Group has been dominating the net courting house 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 (when you don’t know who Ricky Martin is, ask your mother and father). And Tinder, their largest app, is probably the most downloaded courting app on the planet. What’s shocking is it’s nonetheless the undisputed king even after introducing monetization options and charging customers in 2015.

Its portfolio is just not solely deep, it’s extensive 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 govt management intends to take a position most of its assets and power into Tinder and Hinge.

Management additionally expects to extend Tinder’s advertising and marketing spend by two proportion 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 world advertising and marketing marketing campaign this quarter. From its inception, Tinder grew quickly by means of robust, natural word-of-mouth, so there was much less of a have to market. Nonetheless, over time, this lack of promoting has contributed to a slim model notion that doesn’t have fun the breadth of relationship potentialities Tinder creates on daily basis. Via a contemporary, multi-channel model marketing campaign, Tinder may have the chance to showcase the complete 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 world courting app.

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

Relating to Hinge, Match Group acquired that firm in 2019, after buying a 51% stake within the firm the 12 months prior. The app is rising quickly and is the second and third hottest courting app in lots of important international locations world wide:

Right here’s what the corporate mentioned 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 energy 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 heart for Hinge because it continues its world growth 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? Properly, 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 useful these companies change into for each person. It is like the alternative of a pyramid scheme. Enable me to clarify:

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

It is the traditional rooster and egg drawback. As a result of let’s face it, no person desires to affix an empty courting app. The entire level is to have choices, individuals! So, if somebody is searching for love (or simply some informal swiping), utilizing considered one of Match Group’s common apps is an apparent alternative (even when it prices the person a bit of cash).

Apart from 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 levels of their lives when in search of relationships. For instance, youthful customers in search of informal relationships are drawn to Tinder, whereas older customers searching 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 essential areas of the world, that is a number of potential clients.

After all, Match Group is not with out its opponents. However with its broad model portfolio and community impact, I feel the corporate will keep its aggressive benefit. And who is aware of, possibly they’re going to even get away 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 traditional drawback of provide and demand. As Match Group makes it simpler for individuals 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. Positive, you are making progress, however you are additionally losing a number of water (and cash). This might end in elevated bills required to market to and purchase new clients and in the end depress margins—one thing Wall Road is already involved about given Match Group’s latest monetary efficiency.

Then there’s the problem of cannibalization. With so many alternative manufacturers and companies, there’s all the time the chance 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 person desires to be the primary one voted off the island. Will Hinge infringe on Tinder’s turf? It is perhaps too early to inform and a few traders will not be ready to search out out.

However maybe the largest danger of all is pricing. Positive, 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 supply their platforms without spending a dime, thereby miserable margins for your complete business. Match Group might want to proceed innovating to enhance the courting expertise and keep one step forward of opponents.

So there you’ve got it, of us. Match Group’s love empire could also be robust, nevertheless it’s not invincible. They have some dangers to take care of, however I consider they’ll overcome them. In any case, love conquers all, proper?

Valuation

I feel Match Group is undervalued. As of the date of this writing, the inventory is buying and selling for $37.61 per share. I used considered one of 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) every year (each nominal and discounted). The mannequin assumes that Match Group will generate over $1 billion of FCF this 12 months—these are money flows out there to each debt and fairness stakeholders.

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

You possibly can see the complete DCF mannequin right here.

On the earnings entrance, analysts estimate that Match Group will generate $2.75 per share in earnings this 12 months and $3.12 subsequent 12 months. This equates to a 2023 and 2024 price-to-earnings (P/E) ratio of 13.7x and 12.0x, respectively. This could in flip be an earnings yield (the reciprocal of P/E) of seven.3% and eight.3%, respectively. With 10 12 months treasury price at about 3.5%, this can be a premium of 4 to 4.5%.

Technical Setup

Match Group’s inventory is at present 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 prone to discover some assist at these latest lows. But it surely doesn’t imply it might probably’t go even decrease. And, frankly, this chart is just not trying very bullish. That mentioned, I don’t count on the inventory to make any main strikes (up or down) till after the corporate reviews earnings on Might 2nd.

A Conservative Method to Generate Earnings from Match Group Utilizing Choices

For all you savvy traders on the market, let’s speak about choices. Particularly, let’s speak about two choices methods: (1) coated calls and (2) artificial coated calls (typically known as poor man’s coated calls, which feels like a tragic try at a superhero identify).

Lined Calls

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

I like to check coated calls to operating a short-term rental companies like Airbnb (ABNB) or Turo (TURO), however as an alternative of amassing rents on trip houses and sports activities automobiles we’re amassing rents on shares. Enable me to elaborate —

While you placed on a coated 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 revenue. 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 the event you promote an at-the-money (ATM) or out-of-the-money (OTM) possibility, your complete 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 possibility as my month-to-month lease test.

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 take into account 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 price of $3,755.

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

The overall internet value to place this commerce on could be $3,560.

Right here’s the revenue loss diagram:

As you possibly can see, if MTCH is buying and selling at the very same worth as the unique buy worth ($35.61) when the decision possibility 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 possibility premium you collected from Mr. Market once you leased him your upside within the inventory above $38 per share. That is your lease. 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 possibility 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 possibility expires on April 28, 2023, the commerce will nonetheless be worthwhile. The truth is, by my calculation, the commerce received’t go unfavourable till the inventory worth has dropped beneath $35.60 per share. It’s because the $195 of lease is offsetting losses on the 100 shares as the worth decreases till all $195 of lease has been exhausted.

Artificial Lined Calls

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

As a substitute of shopping for 100 shares of MTCH, I might purchase a long-dated, deep-in-the-money name possibility 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 have been to purchase a name possibility with an 85 delta, each $1 improve within the underlying inventory worth will improve 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 possibility is just like shopping for 85 shares. However the actual kicker is that it prices much less to purchase an 85 delta name possibility (even a long-dated one) than it does to purchase 85 shares of the underlying inventory.

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

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

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

As you possibly can see, if MTCH is buying and selling at $38 per share when the near-dated name possibility 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 slightly little bit of revenue from worth appreciation within the LEAPS Choice offset considerably by time decay on the LEAPS Choice (there may be about $1 per day of time decay on the LEAPS Choice). 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 could be noticing the slight downward droop in earnings as the worth will increase above $38 per share. This is because of the truth that the LEAPS Choice has 87 shares price of lengthy publicity as an alternative of 100 shares price within the coated name instance. So, because the underlying inventory worth will increase, the near-dated quick name possibility is creating losses barely quicker than the LEAPS Choice is creating positive factors (technically your LEAPS Choice is rising in delta because the underlying inventory worth will increase, however not quick sufficient to maintain tempo with the near-dated quick name possibility).

One simple method to treatment this slight drop in earnings as the worth will increase, is to purchase 10 shares of MTCH when opening the artificial coated name commerce. This gives a further 10 shares of lengthy publicity and bumps the delta of your lengthy place to 97 from 87.

So, there you’ve got it, of us. Choices could appear scary, however they could be a conservative method to make some money. And when you’re feeling adventurous, you could wish to give artificial coated calls a attempt. However my suggestion is to not double the variety of artificial coated calls simply because they’re cheaper. That’s a fast method to get your self into bother. Take the financial savings and maintain it for a wet day.

Conclusion

Properly, properly, properly, look who’s made it to the top of this inventory evaluation extravaganza! Give your self a spherical of applause, my good friend. To sum issues, I feel Match Group inventory is a lovely long-term funding at present costs. Positive, Match Group is dealing with 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 revenue from Match Group within the close to time period utilizing choices. So, when you’re searching for a inventory to swipe proper on, Match Group may simply be the one for you.