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Match Group Stock Upgraded: What You Need to Know

By Rich Smith - May 10, 2018 at 2:02PM

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Wall Street isn't scared of Facebook -- but maybe it should be.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

It's been a little over a week now since Facebook (META 2.38%) announced it will play the dating game, unveiling a new function devoted to matchmaking on the world's biggest social media service. Match Group (MTCH), which owns such popular online dating sites as Tinder, OKCupid, and of course, saw its shares pummeled on the news, falling 27% in the two days after Facebook made its announcement.

Since then, Match has got back off the mat, and recovered at least some of its losses. It's recovering even more today as multiple analysts weigh in on the threat that Facebook poses to the company.

Here's what you need to know.

Woman smiling at her phone screen as animated hearts fly out of it

Image source: Getty Images.

The threat

Let's start off with the news that has investors spooked: Facebook is adding a new section for "Dating" on its website and app. Details are few at this early date, and the company has not yet confirmed a launch date, or even begun testing the app.

What is known is that at present the company plans to feature full-page profile photos such as Tinder uses, and to integrate a person's dating profile into their Facebook account, "locking" the dating profile until the user chooses to unlock it. Other users, looking for a potential mate, will be able to scroll through unlocked profiles until they find a match, at which point they can start a conversation, or perform more familiar Facebook actions such as liking a photo on the dating profile to attract a user's attention. They can also ask questions that the first user can answer, and add those Q&As to their profile.

That's really about all we know at this point, and as you can see, the details are pretty sparse.

Maybe not such a threat

They also don't appear to be worrying Wall Street very much, judging from today's analyst actions up on Wall Street. Match Group stock is trading just below $39 a share today, which is well below the $47-plus the shares fetched before Facebook made its announcement. So far, four analysts have chimed in with new price targets reflecting how they view the seriousness of the threat to Match Group. And what do they think?

Barclays Capital raised its price target to $39, Susquehanna raised its target to $40, Wells Fargo lowered to $41, and BMO Capital lowered to $45.

In short, various analysts are reacting variously to Facebook's news -- but each and every one of them is saying that Match Group stock is worth more than it's selling for today.

What's more, Swiss banker UBS announced today that it's going a step further and actually upgrading Match Group shares to buy, arguing that it doesn't see Facebook's move having any "material impact" on Match Group stock at all.

Match Group "has a different demographic profile compared to FB while also operating a portfolio of diverse, localized, and targeted dating services," explains UBS in a note on (requires subscription). In contrast, UBS describes Facebook's approach to dating as "one size fits all," attempting to fit online daters into the same framework as the rest of Facebook. UBS appears to view Match Group's greater focus on dating as superior to Facebook's, and has assigned the highest price target of all to Match Group stock today: $48 a share.

UBS also argues that there's plenty of room for "multiple players" in online dating, and no reason to fear that Facebook's entry will kill off Match Group.

The bigger worry for Match Group investors

And UBS is right about that. Given how clunky Facebook's first foray into dating appears at first glance, and given Match Group's focus in the arena and its 23-year head start in online dating, I suspect that worries about Facebook decimating Match Group as soon as Dating comes to market are overblown. There's every reason to believe that both these companies can coexist in the online dating space.

But with all due respect to the analysts who are encouraging investors to pile back into Match Group stock today -- and to my fellow Fools who love the stock as well -- I have to point something out.

Facebook doesn't have to utterly displace Match Group for investors to have reason to worry. All Facebook needs to do is slow Match Group down. That alone would be bad enough news for investors. Here's why:

After last week's sell-off, Match Group has a market cap of $10.2 billion. Add the $1 billion in net debt on the company's balance sheet, and the company's enterprise value is still a very sizable $11.2 billion. Against this valuation, Match Group boasts annual net income of $430 million, and trailing free cash flow of $325 million, valuing the stock at 26 times earnings, and more than 34 times free cash flow.

Now, such high valuations require fast growth rates to sustain them. Currently, analysts who follow Match Group stock are expecting it to grow earnings at less than 15% annually over the next five years. That's not a bad growth rate, exactly, but I'd argue it's pretty slow growth for such high multiples to earnings and free cash flow as Match Group shares carry, and I believe this calls Match Group's stock price into question. What's more, if Facebook's new Dating app only slows down Match Group's growth -- not even stops it entirely -- then I fear Match Group's valuation will become clearly unjustified, and the stock could fall further.

Long story short: UBS and the other analysts singing Match Group's praises today are really whistling past the graveyard. They're underestimating the threat -- and making a big mistake when they tell investors to buy Match Group stock.

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