In this segment from MarketFoolery, host Chris Hill and analysts David Kretzmann and Aaron Bush check out the latest results from Match Group (NASDAQ:MTCH). The company behind dating sites like OkCupid, PlentyOfFish and Tinder delivered some mighty pretty growth: revenue up 36%, subscriber counts up 27%, and margins grew as well. How is it making such progress in a business where succeeding too well for your customers means they'll leave you?
A full transcript follows the video.
This video was recorded on Aug. 8, 2018.
Chris Hill: The stock of the day is Match Group, which is the parent company of Tinder and match.com, among others. Second quarter profits for Match Group came in higher than expected, and they raised guidance for the current quarter and the full fiscal year. This is a hell of a report, Aaron.
Aaron Bush: Funding secured, Chris. That's all we need to say.
Hill: [laughs] Stock up 20% today. Funding secured.
Bush: As it turns out, when you're the top dog by a mile in an industry that's only growing more relevant, you can make a lot of money. Revenue grew 36%. 27% growth in subscribers. 8% uptick in average revenue per user. These are things that, even a few years ago, most people would have been incredibly skeptical that this could even be a sustainable business. Now, here they are, crushing expectations.
This is also a business that's very scalable. People have been critical of their inevitably low retention rates, which have led to some shorting and skepticism from others out there. But it turns out, when you have a huge audience, that's not as much of an issue. If you can convert those people into subscribers at a decent rate, which they are doing, you can start generating cash more quickly and in higher quantity than other people think.
Even over the past year, operating margins rose from 27% to 36%, which is making pretty great progress. This quarter, free cash flow popped 65% over the past year. I see little reason to believe that trajectory is going to go away, even when others like Facebook are weighing in. It's very clear that Match is No. 1.
David Kretzmann: And the stock is up 30% since early May, when Facebook announced it was considering launching its own dating service. That knee-jerk reaction, where Match was down 10-15% just on the speculation that Facebook might enter the category, those fears have reversed a bit now, and rightfully so. Like Aaron mentioned, you're seeing incredible subscriber growth, up 27%. Then, they're also seeing average revenue per user growing both in North America and especially internationally. Across-the board, average revenue per user up 8%. When you have strong growth in subscribers and the average revenue per user or subscriber, that's a great combination and a really solid tailwind.
Like Aaron mentioned, the economics of the business are poised to become more attractive. Today, especially with the younger generation, the stigma of online dating is gone. If anything, it's reversed. It's kind of weird if you're single and not on Tinder or one of these apps. It's become so ubiquitous, and Match by far is the dominant player.
Hill: Aaron, is international where the growth is likely to come for Match Group? It seems like, at least here in the U.S., you look at all the different brands they have under their umbrella, it's very impressive, but it's hard for me to imagine that there are, whether it's organic growth or acquisitions, that there are the types of opportunities here in the U.S. that there will be in other countries.
Bush: I do think international growth is probably going to be the powerhouse for growing the number of users, but I think there's still a huge opportunity to make more money per user. I think that opportunity domestically is still fairly untapped.