Should You Buy Match Group at Its All-Time High?

Match Group's (MTCH) stock hit new all-time highs this week after the company posted strong second-quarter numbers and rosy guidance for the full year. The online dating company's revenue grew 18% annually (22% in constant currency terms) to $498 million, beating estimates by $9 million. Its adjusted EBITDA rose 16% to $203.5 million, topping expectations by about $10 million.

Match expects its revenue to rise 21% to 23% annually during the third quarter, and for its adjusted EBITDA to climb 21% to 24%. It also raised its full-year revenue growth forecast from the mid-teens to high-teens, then boosted the midpoint of its adjusted EBITDA growth forecast from 17% to 20%.

Match's accelerating growth and higher guidance attracted a stampede of bulls, but should investors chase this rally or wait for a pullback?

Image source: Getty Images.

An expanding user base

Throughout 2018 and the first quarter of 2019 Match's growth decelerated. That's why its acceleration in the second quarter caught the bears off guard.

YOY = Year-over-year. Source: Match quarterly reports. *Estimated.

The main catalyst was Match's flagship app Tinder, which grew its average subscribers 41% annually and 11% sequentially to 5.2 million during the quarter. That growth was fueled by the growth of Tinder Plus and Tinder Gold.

Plus, which costs $10 per month, is a basic upgrade for free users that adds unlimited swipes, the ability to undo swipes, five daily "super likes" to get another user's attention, one monthly "boost" to increase visibility, and a "passport" for using the app in other countries. Gold, an upgrade for Plus that costs an extra $5 per month, lets users see who "liked" them right away. Gold members now account for over 70% of all Tinder subscribers.

Image source: Getty Images.

Match is also aggressively expanding Tinder overseas. It's one of the top dating apps in Japan, and it's gradually rolling out Tinder Lite, a lightweight version of the app that consumes less data and battery power, across Southeast Asia.

Match's total subscriber base, including Tinder and all of its other apps, grew 18% annually and 5% sequentially to 9.1 million. Its other main app, OkCupid, grew its direct revenue annually for six straight quarters in North America and is one of the top dating apps in India. Hinge, which it fully acquired earlier this year, more than tripled its global downloads annually as it expanded beyond its base of big cities.

Steady margins and profit growth

Match expanded its user base while maintaining healthy margins. Its operating margin dipped slightly year-over-year during the second quarter, mostly due to higher in-app fees, legal and regulatory compliance costs, and stock-based compensation (SBC) expenses. Its EBITDA margin, which excludes the SBC expenses, also contracted. However, both figures expanded from the first quarter, when Match's margins were weighed down by similar headwinds and much higher SBC expenses.

Source: Match quarterly reports.

Match is also maintaining tight control over its sales and marketing expenses, which accounted for just 25.6% of its revenue during the second quarter, compared to 29% a year earlier. Match's upbeat EBITDA forecast for the third quarter and full year indicate that those margins should remain stable.

That's a stark contrast to Facebook (META 3.19%), which previously tried to challenge Match by adding dating features to its social network. Facebook's operating margin plummeted from 44% to 27% between the second quarters of 2018 and 2019 due to security and privacy-related expenses, higher investments in its ecosystem, and a higher percentage of its revenue coming from lower-margin markets.

So does Match still have room to run?

Match's fundamentals look solid, and its dependence on subscription revenues instead of ads (which account for a tiny percentage of its sales) makes it a less volatile play than ad-dependent peers like Facebook.

Match already trades at nearly 50 times forward earnings, which is a bit high relative to its earnings growth rate. However, that premium could be justified by four strengths: its wide moat in the online dating market, its lack of exposure to China and the trade war, its accelerating growth, and its stable margins.

I think investors can gradually accumulate shares of Match in stages. It's still a solid buy at its all-time high, but a market pullback could cool its valuations down to more attractive levels.