Match Group (MTCH +0.00%) shares were flying higher again this week as the company posted another impressive earnings report. Revenue growth accelerated to 28.5% on the strength of Tinder and the new Tinder Gold product, as the long-term potential of the popular swipe-based dating app continues to take shape.
Match Group shares have now nearly doubled in the last six months since the company launched Tinder Gold, and there could be more growth in store for 2018 after the latest report as investor enthusiasm for the business is growing.
Let's take a look behind the headline numbers for the most important takeaways from the quarter.
Image source: Tinder.
Tinder is on fire
Match Group owns dozens of dating sites and apps, including Match.com, OkCupid, PlentyofFish, Meetic, Pairs, and more. But increasingly, this stock's story is about one brand only: Tinder. The app has revolutionized the online dating industry, and it continues to put up incredible growth. Over the last year, Tinder's subscriber base nearly doubled from 1.6 million to 3.1 million, and revenue more than doubled. The app contributed about 30% of the company's top line last year, and it was the second-highest grossing non-gaming app in the world, behind only Netflix. In the fourth quarter, Tinder had a record 544,000 subscriber additions.
Looking ahead to 2018, the company is focused on product enhancements, including improving the post-match experience to help users initiate and rekindle conversations and leveraging artificial intelligence to label some matches "super likeable", which the company thinks will help female users. The company's also developing location-based features, though management did not want to disclose details before its launch.
The international opportunity is huge
A majority of Match Group's revenue still comes from North America, but there's little doubt of the international opportunity given the universal need for romance around the world. International revenue surged in the fourth quarter, increasing 51% to $161.3 million, and subscribership jumped 36% to 3.2 million. Average revenue per user also increased 11% to $0.54, nearly matching North American ARPU at $0.56.
Even with that recent growth, the opportunity overseas remains sizable. Today, more than a third of relationships in the U.S. begin online, up from just 3% a decade ago. However, that number is significantly smaller internationally, and the popularity of online dating outside the U.S. should grow to resemble the domestic market.
Tinder is also proportionally more popular abroad than it is in the U.S., and management said the majority of Tinder's marketing spend will be in the international segment in order to "build on viral growth and brand awareness".
Considering the momentum in the international market and the fact that companies like Netflix and Facebook derive the majority of their users from outside the U.S., it's likely that Match Group's international segment will eventually overshadow the domestic one.
Profit growth is not a problem
While revenue growth was strong in the recent quarter, operating income lagged as a result of costs from in-app purchases. The increasing popularity of mobile and higher marketing expenses ate into operating profits, which increased 13% to $127.7 million. Earnings per share in the period also fell due to a tax adjustment.
However, management's guidance and its comments on the earnings call should reassure investors that operating margin should expand as revenue grows. For the year ahead, the company expects an operating margin of 30%, up from 27% last year as it sees Tinder driving operating leverage as it gains scale. Management also noted several times on the call that operating margin at Tinder is expanding as CFO Gary Swidler said, "We have a lot of confidence that Tinder is going to expand its margins short and longer term."
It's worth noting also that the 30% operating margin the company is projecting for the year ahead is an indicator of its wide economic moat. Margins that big are typically only seen at companies like Facebook and Alphabet, which dominate social media and search, respectively, and are able to fuel enviable profitability by monetizing user-based content for advertising. They can charge high rates divorced from the underlying cost of the product, because they have little competition. Match Group's model works similarly as it has a competitive advantage with some of the strongest brands in online dating and is monetizing user-based content to sell subscriptions, as well as ads to a lesser extent.
That margin strength should help persuade investors of Match Group's future opportunities as both revenue and profits should steadily increase as its product suite, led by Tinder, continues to grow in popularity. With Match Group's economic moat, improving technology, and secular tailwinds, there's a lot for investors to love here.
