Online dating has exploded in popularity in the last few decades. Recent polls indicate that about 15% of American adults have used an online-dating platform.
On this week's episode of Industry Focus: Tech, Dylan Lewis talks with guest co-host Sarah Priestley about what investors should know about this bubbling new market. Find out:
- How impressively huge Match Group (NASDAQ:MTCH) is in the space
- Why they're just about the only safe way to play this market
- Some significant concerns the company is going to have to address
- How appealing of a buy Match Group is today for investors who want exposure to the space
A full transcript follows the video.
This podcast was recorded on Jul. 8, 2016.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, July 8th, and we're talking tech and online dating. I'm your host, Dylan Lewis, and I'm joined in the studio by Fool.com's Sarah Priestley. Sarah, how's it going?
Sarah Priestley: It's good, it's nice to be here! Thank you very much for having me.
Lewis: You are making your debut on the podcast.
Priestley: This absolutely is my debut, so everyone should give me a lot of leeway, I think.
Lewis: But you've been at The Fool now for four, five months?
Priestley: Four months, yeah.
Lewis: So, we felt like it was time to kind of christen you.
Priestley: Yeah, baptism of fire. (laughs)
Lewis: I'm very happy to have you on the show. You've been doing some awesome work in the tech and consumer goods space.
Priestley: Thank you!
Lewis: I'm excited. I think it'll be a lot of fun to have you on the podcast a little bit more regularly now.
Priestley: Okay, we'll see. (laughs)
Lewis: So we're talking about the online-dating market today. I think it's a very interesting market. Some interesting stats, just to set us off, set some background here: Use of online-dating sites or apps by 18-24 year-olds has tripled since 2013. Apparently, 15% of American adults have used online-dating sites and apps, according to Pew Research. One in 10 American adults spends more than an hour a day on a dating app according to Nielsen data. So there's clearly a lot of people using it.
I think any time you have this broad-stroke interest in a category, naturally investors are curious as to what's going on. So before we dive into one of the big companies involved in the space, do you want to paint a picture -- in terms of some industry numbers -- for the average users, and the size of this market?
Priestley: Sure. The industry is actually pretty large. There doesn't seem to be much analyst opinion on the industry so far, but we'll go in to talk about that later, because I think it's because people haven't been able to play the industry so well. It's actually valued at about $2.2 billion in revenue per year. The growth for the past five years has been 5% compound annual growth rate, and despite the fact that some people are saying the industry is growing down, it's actually expected to grow by $100 million per year for the next five years. So it has scope to grow.
Also, China is estimated to be worth $1.6 billion by the end of this year; they're getting massively into Tinder, particularly, and other online dating. And the market segment is mostly dominated by the 25-34-year-old category, at 33%, closely followed by 35-44-year-olds. So it's actually not the younger people who you would expect to be dominating the market, although they certainly are active in it.
Lewis: And the biggest player, the biggest fish in this pond, is Match. They control 25% of all online-dating services by market share. That is more than twice the next-largest competitor, which is eHarmony, which is just under 12%. And then, no one else in the space occupies more than 5%.
Priestley: Yeah! And there's actually an industry magazine, it's called Online Dating Magazine, and they pose it that there are, worldwide, 8,000 online-dating websites and apps created every year, and only 1% of these are successful. So that just shows you the amount of people who are jumping on this bandwagon.
Lewis: Yeah. So you have this one big fish, and after that, it's a heavily fragmented market space. Match is a natural segue here -- it's a perfect stat to lead into the conversation I want to talk about, because Match is the company we want to discuss. They're kind of the only real way to play this market. If it's something you're interested in on the investing side, they're the only game in town, right?
Priestley: Pretty much.
Lewis: So let's get a little bit of background on them.
Priestley: Match Group was spun off from IAC (NASDAQ:IAC), which we'll talk about a little bit more. They have a portfolio of over 45 brands, which is huge. So they're kind of on a spending spree to buy up everybody that's operating in the market. Since 2009, they've done 26 acquisitions, which is a phenomenal pace. They have 59 million active users across all of their brands, and 5.1 million of those are paid members. They're operating mostly in the U.S., but they have websites across 190 countries, and 38 languages.
Lewis: Which basically covers most of the globe, right? Depending on what stat you look at, there's 196 to low 200s, in terms of countries in the world. So that's pretty good reach.
Priestley: Yep. In any country you're in, you can online date. That's good. They also own the Princeton Review, which is kind of... I'm not sure how I feel about that being part of the company. The Princeton Review is a test-preparation company that mostly operates through providing test papers for SATs. They want to move that online, and they have a lot of ideas about how they're going to improve that business. It is interesting for them, but it fits strangely with the dating.
Lewis: Yeah, you look at their portfolio, and they have these 45 brands, all of them are heavily dating oriented. Match.com, Tinder, which we'll talk about a little bit more -- GenXPeopleMeet, DivorcedPeopleMeet -- it's kind of crazy the different properties that they own. And then, of course, the Princeton Review. IAC Interactive Corp, their parent company, is known for its online properties. I think that's why you have that seemingly odd combination, but it seems like, with what they want to do with the Princeton Review, the online focus in digital orientation kind of makes some sense. We'll get into the revenue mix more there.
But Match really hasn't been directly public for a long time. As I alluded to, they were nested under this publicly traded IAC up until last fall. They only recently sprung off. I think there are a couple different reasons for that. When we were prepping for this show, you talked about the idea that they wanted to separate financials due to debt. Do you want to touch on that a little bit?
Priestley: Yeah. When they bought PlentyofFish, I think they added $575 million of debt. As a result, Moody's downgraded IAC, which meant Barclays analysts downgraded the stock, and all those kinds of things. I don't know that that necessarily played into the decision, but I imagine it was part of the discussion, certainly, because when they spun off Match, they spun off that debt responsibility onto a different entity. Your opinions on this, and I completely agree with you, is that this isn't necessary -- they're offloading bad wood. To a certain extent, I think it's just -- they just want to allow investors a way to invest in the market, and they retain 85% of shares, 98% of voting interest. They clearly want to keep a foot in the door with online dating.
Lewis: Yeah, when you hear "spinoff," sometimes you think, this is a company just bailing on a bad business. You look at what IAC decided to do with a spinoff, like you said, they're retaining 85% and 98% of the voting interest. I mean, it's clear that they think this is a really great business. They wouldn't be holding on to that much of it if they didn't think that. This is kind of like how you see a founder-led business that the CEO and founder still owns 20% of the company after going public. It's one of those things, as Fools, that we really like, because it shows they have skin in the game. They may be going public, they may be accessing some capital, but they want to see this business succeed as much as investors do.
Why don't we talk a little bit about the revenue breakdown, and what Match's top line looks like?
Priestley: Absolutely. They had brought in $295 million in revenue last quarter, and they're a GAAP-profitable company -- which is great for investors. The split between dating and non-dating -- dating comprises 90% of revenue, and the Princeton Review is 10%. They see that becoming a bigger portion of their profits going forward, but at the minute, it's very small. Geographically, the split is predominantly North America. North America is 66% of direct revenue, down, actually, from 69% the first quarter last year. International is counting for 34%, up from 31%. So you can see they're shifting toward the international segment.
Lewis: Yeah. And I think, over time, you're going to continue to see that shift. We talked a little earlier about the huge market potential in China. It was at $1.6 billion sticker figure.
Priestley: By the end of this year, yeah.
Lewis: That's obviously a market they're interested in, and I think there are also a lot of very-compelling international markets aside from China. I think, when you look at this business, that's one of the huge opportunities there, getting outside the U.S. I think there's a decent runway there. Looking at some of the other big opportunities for them, management cites that they only currently use about 2% of their mobile ad inventory, and they see an opportunity for monetization there. In prepping for this show, we were talking about, yeah, there might be some opportunity there; I'm not totally sold on that. What do you think?
Priestley: I'm not sure, either. I think, if they can crack that, that would be fantastic, because they have 5.1 million paid members, and a huge number of daily users. I think if they can tap into that potential, that's going to be huge for them. If you look at the success that Facebook's had, Instagram's had of integrating almost seamlessly some of these ads. My reservation, and your reservation, too, is whether they can do that as seamlessly on a dating site. As we talked about, it's not like Instagram, where you go to look at pictures of fancy food, and you may stumble across an ad for Blue Apron or something. With this, it's very much, you're going on there to find a date.
The example you flippantly used was Tide pods: You don't want to come across an ad for Tide pods when you're looking for your next date. It's true. They're going to have to be very selective about what they choose. They're going to have to be clever in the way that they do it. And they've hired a very notable ad exec to help them do that. Potentially, they will crack it. They're resting a lot on the monetization, particularly, of Tinder. We'll see.
Lewis: Yeah. You look at Tinder -- for our listeners who aren't as familiar with it, it's a very bare-bones interface. I think part of the beauty of it is that it's super minimalistic. It's just an app with someone's picture, and you swipe right or swipe left. There isn't a lot of room for inline ads, the way you think about content, where you can lay it in there with article text or something like that. What I expect most of those advertising opportunities would be is novelty promoted accounts. There's that movie, Mike and Dave Need Wedding Dates. I reopened my Tinder account prior to this show just to do a little market research, and I came across them advertising. What they did was created a character for the movie, and they created a Tinder profile for that character, which I thought was fun. It was an interesting novelty approach to advertising. I think that'll wear on people's patience pretty quickly.
Priestley: I agree.
Lewis: I don't know if they might do something that's more like, you need to sit through this banner ad, or something like that, in order to keep using the service every 10 swipes or something like that. There might be more of an opportunity there. But as the corporate accounts for Tinder go, I don't think it's really what people want to be matching with and doing. It's not really in line with how people are using the service.
Priestley: No, obviously. And given the amount of competition in the industry... they're being very cautious, and I think that's wise of how they play this, because they don't want to discriminate people.
Lewis: Yeah. So, a smaller part of their business right now, but one of their other big opportunities, is with Princeton Review. It makes up less than 10% of their revenue right now, but they see that being a bigger and bigger slice of the pie moving forward.
Priestley: Absolutely. They want to move it to web-based. Obviously, that's going to reduce their fixed costs. And they also want to increase their offerings. There's a college counseling, which is a sideline offering they do now. They want to bundle everything together, and essentially be a one-stop shop for "If you want to get your kid into college, this is where you're going to go." I think that it has the potential to be quite successful for them. They feel that there's a lot of alignment between dating and Princeton Review, getting into college, because they think it's all about what you're looking for in life, what you're aiming to get to. Maybe that's too much... maybe that's not the right way to look at it, but they do seem to have good ideas for how they're going to prove it.
Lewis: What are some of the risks you've identified with the company so far?
Priestley: There's a discussion around: A lot of analysts talk about cannibalization. Greg Blatt, who's the chairman and CEO, has been keen to dissuade people from this view. He's saying that cannibalization is not really something they're suffering from. The issue is slightly more complex in that the soft-wall offering, which is where you don't pay initially. It's a freemium model; you start, and you can upgrade.
Lewis: And the properties that operate on that, Tinder is one of them.
Priestley: Absolutely. I think OKCupid is, also. The soft-wall offerings are growing faster than their hard wall. A hard wall is Match.com, where you pay an upfront subscription, you fill in all your questionnaires, and then you get access to the site. From my perspective, that implies a degree of cannibalization. If you're someone who's looking to meet somebody, you may want to try on a free site before you try on the pay site. Whereas, before, when the free sites weren't as popular or available, you may have gone straight toward the hard-wall offering.
Lewis: Yeah. It's really easy to try out something like online dating for free. Particularly with the younger markets. You look at the millennials, the under 30s, which is a very-valuable segment to be involved in dating -- they charge people on Tinder who are above 35.
Priestley: Yeah, that, the age-ranking pay is just ... it blows my mind. We both can't really get our head around it. They describe it as offering a discount to younger members. And geographically, also, the pay is weighted. If you're in the U.S., you're going to pay more than in other countries, which makes more sense to me than the age demographic. They have been criticized that this is going to alienate a big portion of the market. However, it is almost a clever play, because you have these people, 18-35, who are going to be occupied by the Tinder environment -- this is what they're hoping. Eventually, I guess, the idea is that they'll mature, and migrate to Match.com, which is their pay model. They have an offering for everybody's taste and preference, but also where they're at in the seriousness of the relationship that they're approaching.
Lewis: Another thing, as people move to the soft-wall properties, they have -- a concern for me is that Tinder's moat isn't huge, in my eyes.
Lewis: You look at the more algorithm-type proprietary matching systems that some of these more old-school online dating platforms use, and you say, there's something to that. They have this ability to match me to someone that I might not know, or I might not see that we're connected in some way, that we'd have chemistry. Whereas, Tinder, it's like, you're staring at someone's photo, you find that person attractive, or there's something in their profile where it's like, I'm interested in this person. And then it's just, do they swipe the same way? Do you both agree? On the technical side, that's not super hard to engineer.
Priestley: No. Interestingly, some psychologists have suggested that Tinder's got it right, that actually this initial attraction is the right way to go. However, you're completely right. From a business perspective, there's nothing clever, really, about... there's no algorithm, there's no clever metric going on in the background for Tinder. Whereas, if you look at somebody like eHarmony, they have that 200-word questionnaire. A lot of people found that laborious, but it's working for them. Their current ad campaign, "Do you want fast or forever?" really hits the nail on the head with, are you looking for a quick fix, or is this a relationship you're going to have for life? That's where I see that the market share is going to grow. There's always going to be the market of the younger people who aren't looking for something as serious who are going to go to Tinder. But they have so many choices in apps that they can go to. As soon as Tinder makes one wrong move -- I can think of 10 other apps off the top of my head that people can use.
Lewis: Yeah, there's just a bevy of free dating apps out there. Hinge, Bumble, to name a few. They also get at something that's very similar to what Tinder does. That's kind of a looming threat. To counter that, there's the network effect with any of these types of businesses. The most compelling part of the platform is that there's tons of other people on it, and being the business that's set the landscape and said: "This is what dating apps should look like." Tinder benefits from that. They have the name recognition, and everyone knows someone that's using it. That's really compelling for new people who are looking to get into the dating space.
One other risk I think is worth bringing up is -- you talked about their acquisition history. Twenty-six acquisitions since 2009. They carry a ton of goodwill on their balance sheet -- $1.3 billion, to be exact. That's something that is important to keep in mind when you're looking at an acquisition-heavy company. As a reminder to listeners, goodwill is often the difference between acquisition value and the intrinsic what-you-can-peg value of a business. If I buy Sarah Priestley Enterprises for $7 billion, and the market value of that is currently $5 billion, I'm paying a $2 billion premium; that's being pushed along to the balance sheet as goodwill. That's fine, so long as we're able to realize that premium we see in the business.
If you want a great layout of how this can go poorly, check out the write-off episode that Sean O'Reilly and I did a couple months ago. There are a lot of acquisitions that simply don't work out. They've been really smart in acquiring businesses that are within their niche, and align very well. They build out this very robust portfolio of hyper-focused dating sites. But as a serial acquirer, that's something you need to be aware of.
Priestley: Yeah, they've paid a premium to own the amount of companies in the industry that they own.
Lewis: And that's established them as this huge market leader, and how they manage to have twice the market share of anyone else. The downside of that is they carry a ton of goodwill.
Priestley: Yeah, it's just something that investors should bear in mind, I think.
Lewis: Lastly, looking at their valuation and how to think about this business, on a trailing P/E basis, they're around 30. Their forward P/E is 15.5. There's obviously a big ramp-up expected within the coming year. Those are pretty attractive numbers. The reality is, this is a business that grew its top line 20% last quarter, and they're GAAP-income positive, which is nice to hear. That's not always the case for these high-growth companies. And they operate in a space that's very easy to scale. They're moving toward pretty much pushing everything online, with the Princeton Review stuff, and all the dating stuff they do it online, so there's not a ton of overhead with those types of businesses. It's actually a pretty attractive valuation, given their growth.
Priestley: It is an attractive valuation, especially if you buy into the growth in the industry at large. This is rarely one of the few plays you can make into the industry. And yes, there are a number of other players, but most of these players are operating under Match Group. Really, you're spreading your risk. If you're interested in online dating from an investor's perspective, if you believe in the growth that it's going to continue to have, and it's shown great potential, then this is really a good idea.
Lewis: Yeah, this is the way to play it. I'll say, you need to buy the story of people pivoting from the freemium model over to something that causes them to pay. Whether that story will play out remains to be seen. But I think that's a very-important narrative to watch with this company.
Priestley: Absolutely. You have to be able to see if they're going to be able to monetize websites like Tinder. It remains to be seen.
Lewis: They've seen some success with Tinder Plus, and some of the incremental product increases and developments they've done. Those have done a pretty good job of stoking the fire. It's certainly a fun company to watch. We'll check them out in the coming quarters and see how they do. I'd be happy to do an update episode in a couple months and see how they're doing.
Priestley: Sounds good.
Lewis: Before I let you go Sarah, any questions?
Priestley: Nope, absolutely none.
Lewis: You absolutely crushed it on your first episode. I was so happy to have you on, and I look forward to having you on again in the future.
Priestley: Thank you, I'd love to be here.
Lewis: Well, listeners, that does it for this episode of Industry Focus. If you have any questions, or just want to reach out and say hey, shoot us an email at IndustryFocus@Fool.com, or you can always tweet us @MFIndustryFocus. If you're looking for more of our stuff, please subscribe on iTunes, or check out the Fool's family of shows at Fool.com/podcasts. If you're looking for more tech content from the Fool, follow us at Facebook at Motley Fool Tech.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear here. For Sarah Priestley, I'm Dylan Lewis. Thanks for listening and Fool on!