Match Group: The Dating App Company With Middling Results (MTCH)

Overview

Match Group Co., Ltd. (NASDAQ: MTCH) is a technology company and owner of a portfolio of dating applications. The company’s holdings include his leader in the marketplace, Tinder, as well as lesser-known apps like Hinge, OkCupid, and Plenty of Fish.Its total portfolio includes Over 40 companies.

Match Group, formerly part of media conglomerate IAC, spun out in Q2 2020. It rose (wisely) during the pandemic, but has since lost value and is now trailing the S&P 500 (SP500) and Nasdaq Composite (COMP). .IND).

Match Group is a unique player in that it is both the largest entity in the e-dating market and also owns major brands. It sits between his two distinct long-term trends: the overall surge in online activity and online dating, and the new post-pandemic situation. The two are contradictory, but both are worth remembering. In this article, we review Match Group’s financial position to determine whether it is a good investment at current prices.

Finance

Match Group’s latest earnings report slightly beat consensus expectations, with EPS of $0.58 beating consensus by $0.01 and quarterly earnings of $809.55 million, beating consensus by $16.33 million. It’s safe to call these numbers total inline performance. We review the company’s financial results for the last 11 quarters, including the first quarter of 2020, which preceded the second quarter of 2020 spin-out from IAC.

Meanwhile, revenue growth has been solid, with quarterly revenue up 49% from Q1 2020 to Q3 2022. However, revenue growth has slowed significantly. While showing trendline acceleration through the pandemic, this momentum appears to have stalled in the last two quarters. It halves first, then drops to less than 1% year-over-year in the latest quarterly results. It’s fair to say that the company’s favorable long-term positioning during the pandemic has come to a complete halt.

Match Group also faced an increase in its cost structure throughout the period, which is reflected in its operating profit trendline. While correlated with year-over-year revenue growth, this number generally accounts for a significant portion of what was generated in revenue growth, with the notable exception to this being Q1 2021. , which seems to be his one-off. Operating profit actually declined in the most recent report, especially for the first time in the past two financial years.

The implication here is clear. Match Group’s growth has come with declining levels of capital efficiency. The company has consistently increased its spending on sales and marketing of its services significantly throughout this period. It’s been down a little bit over the last two quarters, but it’s fair to say that we had to do that to generate revenue growth to date. Revenue growth slowed as marketing spending slowed. The question investors have to ask is how stable the company’s earnings base really is. I can’t make a decision on this yet.

Looking at net income to get the final word on profitability, Match Group is generally a profitable company. Given the ongoing acquisition spree, it is prudent to conclude that these non-operating expenses are directed toward fair use of capital. Keep an eye out for March 2022 results.

The company’s cash flow situation also appears docile. A statistically unusual result in Q1 2020 was due to a cash injection from the parent company before it was spun out. It’s not very neat when it comes to trendlines, but the company is clearly generating positive free cash flow, which it often applies to acquisitions. It doesn’t look like it, but the disparity between unleveraged and leveraged cash flow suggests it does.

Overall, I am pleased with Match Group’s ability to generate free cash flow.

Looking at the company’s valuation, we see Match Group trading at a P/E multiple of 130x. That’s a very high number, even for today’s technology sector. For this to make sense, we need to estimate very significant levels of revenue growth over the next few years. In particular, the P/E ratio has spiked over the past 12 months and appears to have declined over the next several quarters. This impact will be seen in Q1 2022 and Q3 2022. This means that the company’s earnings are not keeping up with its valuation, and as a result it is being sold. This is certainly a negative indicator from a technical point of view.

Conclusion

Match Group is a mature tech company and a dominant player in the online dating space, but it doesn’t look like a very good stock. You seem to have a mentality of “I will grow no matter what”. This is evidenced by its acquisition habits and heavy spending on sales and marketing. Like its predecessor parent, it is a conglomerate.

This strategy has allowed Match Group to trade at very high multiples while revenue growth appears to have stopped altogether. While there are obvious economics to combining entities of this nature, there are also many associated costs and overall ramifications for corporate strategy. This is why, historically speaking, many conglomerates have actually fallen short of expectations based on the sum of their parts. A dramatic drop in operating profit is a red flag in this regard.

It earns cash just by continuing to operate, but the company does not issue dividends to pay this back to shareholders. If there’s anything left to acquire, we may continue to acquire it. Cautious investors should ask themselves whether Match Group can actually grow earnings organically with its portfolio. This requires peeling off this company’s intricate onion, and at first glance, I’m frankly skeptical. Otherwise, this quarter’s year-over-year performance wouldn’t have been so bad.

The online dating space is a competitive and fickle place with low switching costs for users to move between different apps. It became clear in the financial situation that underlies this security. The jury is still out on this stock, but I’m going to go with my gut and call Match Group a sell.