Shares of Match Group (NASDAQ:MTCH) recently dipped after the Federal Trade Commission sued the online dating company for "using fake love interest advertisements to trick hundreds of thousands of consumers into purchasing paid subscriptions on Match.com."
Match lets users create free dating profiles, and they receive alerts when another user interacts with their profile via likes, favorites, emails, or instant messages. But they can't respond to those alerts without upgrading to paid subscriptions, and the FTC alleges that some alerts come from fraudulent accounts.
The FTC claims Match flagged those fraudulent accounts but didn't purge them, because they brought in more subscribers. The agency also notes that customers weren't warned that up to 25%-30% of new Match members who sign up daily "attempt to perpetrate scams, including romance scams, phishing schemes, fraudulent advertising, and extortion scams."
The FTC cites Match's own analysis from June 2016 to May 2018, which found that users bought 499,691 subscriptions within 24 hours of receiving an ad touting a fake alert. It also alleges that Match made it difficult for those subscribers to cancel their subscriptions.
That's a bad look for Match, and investors might be wondering if it's time to sell the stock, which remains up 70% for the year. Let's dig deeper into the potential impact of the FTC lawsuit to decide.
Gauging the impact on Match
Match owns dozens of online dating sites and apps, including Match.com, OKCupid, PlentyOfFish, Pairs, Hinge, and Tinder. Its total subscriber base grew 16% annually to 9.1 million last quarter.
Within that total, Tinder's subscriber base grew 41% annually to 5.2 million, thanks to the growth of its top-tier platform Tinder Gold. That makes Tinder the company's core growth engine -- and it remains shielded from the FTC's complaints.
Match doesn't regularly disclose its subscriber numbers for Match.com or its other apps. But it regularly touts Tinder and OKCupid as its top apps, while its recent comments about Match.com and its app -- which mainly target older singles in their 30s and 40s -- indicate that it's not a top priority.
Last quarter, Match stated that its namesake app "continues to evolve" with new features like the AskMatch live dating coach, but also reduced the platform's marketing budget -- which likely freed up more cash to expand Tinder and newer apps like Hinge, which more than tripled its worldwide downloads annually. Simply put, Match isn't a top priority for its parent company anymore, and the lawsuit's impact should be limited if the FTC doesn't expand its allegations to its higher-growth apps.
In a worst-case scenario Match might need offer refunds to nearly half a million subscribers, settle with the FTC, and tighten up its policies regarding fraudulent accounts and notifications. That would dent its growth, but it could likely offset those declines with the growth of hotter apps like Tinder, OKCupid, and Hinge.
Match disclosed the FTC probe over two years ago
Match's investors shouldn't be surprised by the FTC lawsuit, since the company already disclosed the agency's investigation in previous SEC filings.
In its 10-K filing earlier this year, Match disclosed that the FTC launched its initial probe in March 2017. The agency proposed to resolve the case last November with a $60 million settlement and an agreement to change its business practices, but Match refused the deal, stating that the claims are "without merit" and that it is "prepared to vigorously defend against them."
This suggests that the maximum financial impact could be $60 million, which equals less than 3% of Match's projected revenue this year. That's a slap on the wrist, and investors should recall that Match's revenue growth accelerated with 18% annual growth last quarter, and the company expects that growth to accelerate again in the third quarter.
Investors should focus on other issues
I believe Match's investors should shrug off the FTC lawsuit. The investigation has already dragged on for over two years, and the worst-case scenario won't cause any lasting damage unless it spreads to bigger apps like Tinder.
Instead, investors should focus more on competition from domestic rivals like Bumble, overseas rivals like India's TrulyMadly, and newcomers like Facebook Dating. Facebook Dating offers free dating features for the social network's massive base of users, and could lure people away from Match's paid subscriptions. Those issues, not the noise from the FTC, will determine if Match remains a reliable growth stock over the next few years.