Love is big business. Just ask Momo (NASDAQ:MOMO) and Match Group (NASDAQ:MTCH), the largest dating and matchmaking app companies in China and the U.S., respectively. Finding a partner online is only becoming more popular, and these two social media businesses are reaping the rewards.
Nevertheless, the stocks have been on diverging paths over the last 12 months, with Momo shares about flat while Match Group's gaining approximately 45%. However, the tide could be about to turn in Momo's favor after its lackluster showing.
It's all about Tinder
Match Group owns a large stable of apps and websites to help people find partners, but it is best known for Tinder, the largest dating app in the world. As of the third quarter of 2018 the company had 8.1 million average subscribers, a 23% year-over-year increase. Most of that can be chalked up to a 61% gain in Tinder users compared to the year prior. In addition, average revenue per user also grew 6%.
The expansion in average user count has led to strong returns for shareholders. Revenue through the first three quarters of 2018 was $1.27 billion, a 34% increase over 2017's numbers. More importantly, as Match Group adds more subscribers, its profit margins go up even faster than its sales. Adjusted earnings increased 128%, and free cash flow (money left over after basic operating expenses and capital expenditures are paid for) grew 94%. As a result, Match's stock is up big over the last year.
However, a cool-off could be in order -- management said revenue is expected to only grow 17% year-over-year at the midpoint of its guidance range for its fourth quarter. That top-line add should again equate with an even more dramatic increase for the bottom line, but that growth may already be reflected in Match's lofty valuations: Its shares carry approximately a 30 12-month forward price to earnings (PE) ratio and a 12-month trailing PE of about 42. That's a premium price to pay, one that hinges on Match continuing to serve up double-digit returns on profits.
Dating and entertainment, too
Momo also operates a diversified portfolio of social apps, and is expanding into the world of digital entertainment. The company is best known for its location-based social matchmaking service, which includes Tantan, the Chinese version of Tinder that Momo acquired in the spring of 2018. Momo said it had 110.5 million monthly users at the end of the third quarter including 12.5 million paid subscribers, increases of 17% and 71% year over year, respectively. Momo is now the most popular way Chinese singles look for romance on the web.
The increase in user count was good for a 57% year-over-year rise in sales to $1.47 billion through the first three quarters of 2018. Adjusted earnings grew 51% to $1.87 over that same period. The bottom line grew at a more sluggish pace due to heavy investment back into the business, especially in the aforementioned digital entertainment space, which includes Momo's production of the popular Chinese TV variety show Phanta City.
Investors have been worried that heavy spending isn't paying off. Revenue growth is steadily decelerating, and management said that fourth-quarter sales should come in "only" 43% to 47% higher year-over-year. Nevertheless, given the company's strong results, shares are valued at a 12-month trailing PE of just 14, and a 12-month forward PE of about 10. That looks like a cheap valuation for a business reporting double-digit increases across the board.
The better dating app buy
While Match Group and Momo are both slowing down, the two romance-finding services have a lot of runway ahead, especially when it comes to growing profit margins. Of the two options, the Chinese version of Tinder is a better value given the expectations for its expansion relative to its conservative valuation. Match Group, on the other hand, is priced at a premium, and has slowed down at a much faster pace.