Shares of Match Group (MTCH), the parent of Tinder and dozens of other dating apps, weren't looking so hot after the company released its latest earnings report.
The stock was trading down as much as 15% after hours following its third-quarter earnings release. Revenue guidance for the fourth quarter missed the mark, and investors fretted about a Federal Trade Commission investigation, other legal woes, and the likely spin-off of IAC. However, the breakdown didn't last long. In the regular trading session, the stock recovered nearly all of its losses, finishing the day down just 2.5%.
Let's take a look at why the sell-off didn't last, and why the stock still looks like a good buy today.
1. The guidance wasn't as bad as it looked
Management said it expected revenue of $545 million-$555 million in the fourth quarter, representing 19%-21% growth, but that was worse than the analyst consensus at $559.3 million. Growth stocks like Match tend to get tripped up by weak guidance.
However, Match explained the discrepancy on its earnings call. First, foreign currency exchange shaved $6 million off of total revenue, primarily due to changes in the pound and euro. Second, Apple made changes to its customer renewal process that are having a negative impact on subscriptions by causing temporary terminations. Management said that would impact net subscriber additions in the fourth quarter and first quarter of next year, but that it's only pulling forward cancellations that would have happened anyway.
Discounting those two headwinds, Match's growth remains steady and in line with past quarters and analyst expectations. The market seemed to have initially feared a threat from Facebook Dating, but management said that the rival launch has had no impact.
2. There's growth opportunities galore
Ever since Tinder started to prove itself as a profit machine, Match has been one of the best-performing stocks on the market, with shares up more than 300% over the last three years. Today, however, the company may have more growth opportunities than ever before.
The international market continues to represent enormous promise, as growth outside the U.S. is accelerating thanks to product localization and marketing efforts. Outside of North America and Western Europe, direct revenue jumped by nearly 80% in the quarter, accelerating significantly through each quarter this year.
On the call, management noted that Tinder is the highest-grossing lifestyle app in about 100 countries around the world, but it still sees significant growth potential in large markets like Japan, India, and South Korea. Dating and relationships are a universal need, so Match's addressable market arguably includes anyone in the world who's single and has access to the internet.
The company also found success with a new concept called Swipe Night, a five-minute interactive video targeted at its youngest users that gives them the ability to choose what happens next in the adventure. The experiment saw significant engagement with younger users and women as millions tuned in for the show, and it led to double-digit increases in messages and matches.
Finally, Match is seeing traction with recently launched apps like Chispa and BLK that target specific demographics, which have seen 95% and 273% increases in downloads, respectively, from a year ago. That growth shows the company's ability to develop new products to fill in gaps in its portfolio and meet existing demand before a competitor does.
With growth in Tinder remaining strong, Match has multiple ways to continue to expand and attain optionality, increasing its upside potential.
3. The stock is still a good value
Match represents a rare combination of growth and value on the market. Much like Facebook, the company has significant competitive advantages thanks to network effects and switching costs. Users naturally want to be on the platform with the greatest number of other users, which gives them the greatest potential to find a match. It's also time-consuming to make profiles and engage with several apps, giving users an incentive to stick with one once they've started.
Like Facebook, Match also generates fat operating margins, at 33% in its most recent quarter. Match brings in revenue through subscriptions, while Facebook relies on advertising, but Match has a dream business model. Once an app reaches a certain scale and popularity, it can grow on its own through word of mouth, naturally lifting profitability, and will likely remain successful until a better product comes along or tastes change.
For a fast-growing, highly profitable stock, Match trades at a price-to-earnings ratio of just 37, which seems very reasonable for a company with revenue increasing by 20% and multiple long-term growth opportunities in front of it.
If Match shares fall any further, investors should take advantage and swipe right.