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...
Match Group (NASDAQ:MTCH) has had a wild ride this past year.
From February through September 2018, shares of the Match.com owner nearly doubled in price, passing $60 before losing nearly half their value in the late 2018 tech rout (which was admittedly exacerbated by Match Group's own weak forecast in November). Then, in a remarkable turnaround, Match Group joined the tech rally, and shot right back up 50% again! Today, at a share price of nearly $55, Match is just slightly below its highs of last year.
And now Goldman Sachs says you should sell it. Here's what you need to know.
An initiation at sell
TheFly.com has the details. This morning, investment banker Goldman Sachs initiated coverage of Match Group stock with a sell rating and a $45 price target. Simultaneously, the analyst initiated coverage of Match parent company IAC/InterActiveCorp (NASDAQ:IAC) with a neutral rating and a $226 price target.
As Goldman explained in its note, the long-term outlook for Match Group looks good, however, the stock's valuation gives the analyst pause. Match Group currently sells for nearly 46 times trailing earnings, and more than nine times sales. Although the company boasts strong free cash flow -- $488 million over the past 12 months, which is well ahead of its reported net income of $353 million -- Goldman worries that the stock price is "high relative to its growth."
Matching price and value
And I have to say that I agree with that assessment. Analysts polled by S&P Global Market Intelligence expect that over the next five years, Match Group is likely to grow its earnings at nearly 15% annually. That's not at all a bad growth rate. It is, however, arguably too slow to justify paying 46 times earnings for the stock -- or even 31 times free cash flow, which is what Match Group shares currently cost. (They actually cost a bit more than that, once you factor in the company's more than $800 million in net debt on the balance sheet to arrive at Match Group's enterprise value.)
Worries about expansion costs
Complicating matters, Goldman Sachs goes on to explain, is the fact that Match Group's growth -- already too slow to support the stock's elevated valuation -- might be slowing. Customer churn, warns the analyst, at Match subsidiary Tinder's Gold service is preventing Tinder from growing as fast as it would like.
This isn't a problem unique to Tinder (or to Match Group). In fact, the website BusinessofApps.com notes that only three other dating apps have churn rates lower than Tinder's 20.9% churn rate. For comparison, Match itself has a churn rate of 33.5%, and Hinge's churn clocks in at 28.1%. And yet, even if Tinder is better than most, its weekly churn rate is still high enough that, for every five customers the app attracts with its marketing dollars, it loses one the very next week!
Speaking of Hinge -- yet another dating app owned by Match Group, which focuses on customers seeking longer-term "relationships" -- Goldman says that Match is likely to need to spend more money marketing Hinge now that it owns a majority stake in that app. This, combined with higher costs for regulatory compliance, could "dampen" the company's profit margins going forward.
In that regard, it's worth pointing out that while Match Group's operating profit margin has climbed pretty steadily over the past couple of years, data from S&P Global shows that gross profit margins have fallen. Grossing more than $0.89 per each revenue dollar in 2013, the company today sports a gross margin of less than 77%.
What it means for investors
So what does this all add up to for investors? Having hoovered up most of the popular dating apps out there at present, Match Group pretty much has a lock on the online dating market presently -- and that market continues to boom. That being said, the stock's share price reflects Match Group's dominance, and there's a real question as to whether the stock remains cheap enough to buy after its rapid run-up.
So how do you avoid overpaying for Match Group? Perhaps by buying its parent, IAC/InterActiveCorp, instead. At a market capitalization of $17.6 billion, IAC only costs a bit more than Match Group's $15.2 billion. Yet with $4.1 billion in trailing revenue and $468 million in GAAP earnings, you get a lot more sales and profits for your money when buying IAC stock than when buying Match stock -- more than twice as much sales, and 32.5% more profits, resulting in a P/E of 38 on the parent (and a price-to-free-cash-flow ratio of less than 25).
On top of all that, analysts are expecting IAC to outgrow Match on profits, projecting a 25% growth rate for the parent company versus just 15% for Match. Given the relative valuations, I have to agree with Goldman on this one:
IAC stock is a better buy than Match Group.