Bottom-Fishing and Trend-Chasing: Exxon's Writedown and Renewable Energy's Surge

In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool contributor Jason Hall about energy stocks, like Exxon (XOM 1.15%), that have been beaten down, and some, like many renewable energy stocks, that have been on a tear in 2020. Is there value in beaten-down oil stocks? Should you pay up for growth in renewable energy? Jason and Nick discuss these topics, as well as sharing some of their picks for stocks to watch.

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This video was recorded on December 3, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. Today, we're taking a look at two kinds of stocks. Stocks that have been beaten down and stocks that have just absolutely ripped. Motley Fool contributor Jason Hall joins the show today where we're going to take a look at Exxon's troubles and whether it can recover. And we'll hit the listener mailbag to discuss some high-flyers folks just can't stop asking us about.

Jason, great to have you back on the podcast, as always.

Jason Hall: It's good to be on. I'm really having trouble not laughing because of a comment you made before we started the show, "Thundercats go!" That needs to be on the podcast, so I needed to say it out loud; I feel better now.

Sciple: Well, there you go, yeah, so on the show, yes, that's just like from Juno, right, whenever she goes into labor, she says "Thundercats are go!" that's where I got that from. So, I love that movie. Yes, so this is our first show back from Thanksgiving. Do you do anything super-exciting for the holiday?

Hall: You know, with COVID and everything, and you know, I'm stranded out here on the West Coast, all of our families back in the South, we really didn't, except for one little thing. We have a little pod, we've got some friends that our kids are in the same day care, so we have like this exact same COVID risk profile. And they're also from the South, big Georgia fans, so we hung out together. That was kind of nice. Because we never see them during the holidays, because like us, they're all traveling. So, that was kind of nice, right? We made a little bit of lemonade out of the lemons; so, it was good, it was good. How about you?

Sciple: Yeah, same thing for us. We kind of stuck around, we're up in Virginia, most my family back home in Alabama, probably going to try to get down there safely for Christmas, we just kind of stuck around, you know, made some sides, picked up a honey baked ham; all those sorts of things, just great to have some time off from work. And you know, I'm one of these people that's picked my videogame habit backup during the pandemic. I played way too much of the new Call of Duty. So, there you go.

Now we're back on to stock. So, we get to go into stocks, Jason. We're going to lead off, as I said off the top of the show, we're going to talk about some stocks that have beaten down. Well, one particular stock that's been beaten down, and we'll talk about a few that folks are asking us about a lot that have just been ripping this year.

Before we get into Exxon, when you think about shopping for companies that have just been beaten down or trading near the 52-week lows, how do you think about those companies as potential investments?

Hall: There's a couple of ways you have to look at it, right? I think the easy thing to do is to anchor on where the price was before COVID, and immediately assign, hey, it's going to go back, right. I think it's really easy to do that. And in some cases, I think that is true. But the issue is thinking about it from a business perspective, right? You think about what is a good business that's experiencing temporary problems that's going to emerge in good shape versus what's a business that was struggling before this happened, and really 2020 has been more of a catalyst to expose the problems with that business and it's going to emerge likely weaker, right. That's one thing I'm really, really thinking a lot about when I'm looking for bargains right now, because there are some. But there's also just some not great businesses that don't have great futures, that it's really easy to anchor on 2019 and say, well, the stock has to go back up.

Sciple: Absolutely. I think one of the things that I think about a lot, with things that have happened this year with the pandemic, is what trend got pulled forward? There are some trends that are really great that have gotten pulled forward, like, remote work and things like that, that have really brought Zoom ripping. And then there's other trends, like we might talk with Exxon here today, that have been pulled forward that have really created some trouble for a business.

In the case of Exxon, this week on Monday, Exxon announced its intention to write down some of its natural gas investments by $17 billion to $20 billion; its largest ever writedown. And this is something we've been talking about for a long time when it comes to some of these shale assets not producing earnings, and now we've really seen that come to head this year with significant amounts of writedowns; Exxon being the latest of those.

Hall: Yeah. The bottom-line is -- the thing that, kind of, underpins what's going on with ExxonMobil specifically, to me, it's kind of like a symptom of something that I think a lot of people haven't really followed with the company that's been going on for a while. But this goes back to, I don't know, more than a decade ago when ExxonMobil made, what really in hindsight bias a little bit, but also at the time there was this idea that when it bought XTO Energy, it paid like, $40 billion for -- at the time, it was the largest natural gas producer in North America. And this is going to wipe out basically half of that. And to me, I think, there's a bit of it that's kind of smart, that ExxonMobil is saying, OK, this is the hardest place for us to really predict being able to generate positive cash flow out of these operations. And it's another step toward really doubling down on a lot of their oil business and kind of focusing on really leveraging their integration. So, I think that's what they're doing. But it just points to a history of things [laughs] that haven't worked, right, for ExxonMobil.

Sciple: Right. So, yeah, that XTO deal, just to put some numbers on it, that was in late-2009, $41 billion deal, right at, really, the peak of the natural gas hype. You think about, in 2009, that's when Chesapeake Energy was really at its peak and dominating a lot of headlines; obviously that company just went bankrupt this year. So, really, really tough. And you look at the natural gas market, right, natural gas prices peaked back in 2005 at $15 per Btu, now they're at $3; it's really been tough with all this shale production that's come online.

In conjunction with that announcement of the writedown, Exxon has talked about their work, trying to get their expenses under control, they're going to reduce their global workforce by 15%, they're reducing their capital expenditures. Earlier this year they had a projection of $30 billion to $35 billion a year in CapEx through 2025, now they've bumped that down to $19 billion or less in 2021, and $20 billion to $25 billion a year through 2025, just trying to get their expenses under.

You look at the stock; shares down 42% year-to-date this year. You look at the yield at 9%, a lot of folks might say, hey, you know, 9% yield get paid to wait with this energy giant in Exxon; thoughts there on that thesis of, hey, well, the business is turning around, it's getting its expenses under control, well, maybe I can buy this dividend and wait and get paid until things turnaround.

Hall: I mean, we do know that management is prioritizing trying to keep that dividend afloat; there's no doubt about that. But something you and I were talking about, as we were prepping for the show, and I, kind of, sort of, intellectually knew it, but I had never really looked super-closely at it, but here's the bottom-line. If you look at ExxonMobil and you go back all the way to, I don't know, 2016, 2015 somewhere around there, ExxonMobil has paid out more in cash, has paid out more in dividends than it has generated in free cash flow. So, its cash dividend payout ratio has been above 100% for essentially five years.

As much as we can look at 2020 and say, well, the oil price crashed, the demand crashed, of course, they're going to be paying out a lot of cash in dividends this year that they're not going to be earning. I mean, you go back and oil prices were -- I don't know, let's see, just for giggles, let's go back and take a look. So, oil prices were consistently in the, I don't know, in the $60/barrel, $70/barrel. And they were still spending more cash [laughs] to support that dividend than they were bringing in from their operations. That means that a lot of the debt that they've added over the past five years has partially been to support that dividend. So, this isn't a 2020 story on using debt to fund that dividend, this is a five-year story. That's something investors really need to consider.

Sciple: Yeah, absolutely. It's one of the things, like I said earlier, kind of pulling forward this trend we've seen for a long time when it comes to the oil prices Exxon needs to be breakeven on its dividends and maintain its capital expenditure in order to maintain its production, all those sorts of things, they've needed to tap into the debt markets just to support their dividend. And that continues here.

What do you think are the chances that they cut their dividend?

Hall: It's certainly greater than zero. I don't know, I think if you were to corner one of their executives and, you know, at gunpoint make them tell you exactly what they thought, I think they would say that they're very uncertain. I really think they would have to admit that it could have to get cut in 2021. Because here's the reality, the debt market has largely been pretty forgiving for ExxonMobil, because it is one of the industry heavyweights, it has massive assets, it does have a lot of really good low-cost oil assets, it does have a business that as it gets more integrated should be able to generate more profits across the entire value chain. And that's important, right, because this isn't just the cost of oil, the cost of natural gas driving its results, it has a really good integrated business, and the more it can tighten that integration, it can start leveraging its refining, its petrochemicals business -- which is something it's focusing on. So, the debt market has been forgiving.

But at some point, a banker is going to step back and say, guys, you can't keep paying this big dividend. I mean, this has happened to Kinder Morgan a few years ago. Kinder Morgan kept spending this money and kept spending this money to build its operations and also kept paying the big, big dividend, and eventually got to the point where the debt market said, something has to change, because your balance sheet is not working and you have to think about how you're allocating capital to who. And I think that that sort of a reckoning could come back around to ExxonMobil, because the bottom-line is they still have to spend that $20 billion a year to build out their E&P [Exploration and Production] business, they have to do that, right. They're going to have to do that. I think the end goal is Guyana, right? Guyana, where their big offshore play is, they've targeted the Permian, they say the Permian is still where they want to spend money to develop those oil assets. It's going to cost a ton of money to continue to do that. As much as they've cut their projected CapEx spend, they're still going to be spending a ton of CapEx.

Here's what I think, I don't want to ramble too much here, but I think we're going to see oil markets remain very, very volatile. No matter what happens going forward, the peaks-and-valleys are going to be super-sharp, and I think that that's going to make it a challenge for them to continue to support this kind of a payout, if they can't show cash flow growth, and that's where we are.

Sciple: Yeah, I think the tell there on the dividend is if you look closely at the language when they put out this writedown, is the language changed from, we have a reliable and growing dividend, so we have a reliable dividend. Which tells you all you need to know about management's confidence in their ability to increase it over time, and in their ability to maintain the payout that they have. I do think one thing that we should always note with oil stocks is we're seeing across the board, Exxon, lots of other companies, cut their CapEx, which is going to impact production here sooner or later. You know, there's this whole idea that in oil markets low prices, cure low prices. So, maybe oil starts snapping back as we see underinvestment in production, and that helps Exxon on the cash flow side.

But I would say, you look back, you know, this year the stock has been beaten down because of COVID, but even if you look back over this past 10 years or so, you know, as the shale market has grown out, this is a business that, from a fundamental point-of-view has had more and more struggles and has really been having to tap into debt markets in order to maintain its dividend and those sorts of things. So, this is not one that I would be betting on for a bounce back today in that space.

Hall: Yeah, there's just too much uncertainty. And I think another thing, I think a lot of people are doing when they're looking at the oil markets and they're looking at these big fully integrated producers as maybe places of safety or places of exceedingly good value, is I think they're expecting history to repeat itself when it comes to Saudi Arabia, when it comes to Russia, when it comes to some of the other OPEC partners and what they're going to do. Yes, they've acted as huge stabilizing forces this year to try to prop-up the market. And they've done that for, really, three or four years now; five years almost.

I don't expect that's going to be the case going forward; I really, really don't. But you have to go back to late-February, really all through February, Saudi Arabia launched a full-scale market war, it just so happened that the timing [laughs] was pretty bad, because then COVID happened and global oil demand fell 30%. But at one point Saudi Arabia had pushed its oil exports up, like, 30%. I mean, it was just enormous the amount of oil capacity that they were pouring into the market to take market share, was absolutely enormous. I don't expect that these oil, these oil national, these oil nations, the Petro states, are going to step back and let the Permian take the market share that it took, they're going to lets the Bakken take the market share that it took, that shale surge that drove the U.S. to the largest production in the world, I think that's going to happen again, I think they're going to fight much harder for market share. And I think that's a concern for the ExxonMobils of the world that are saying we're focusing on the Permian.

When the low-cost leader is going to -- you know, it's a single-digit oil production cost for a lot of these OPEC countries, they're the low-cost leader. And I think there's a bigger threat there than a lot of people maybe necessarily are factoring in.

Sciple: Yeah, it's a fair point. And I think there's an OPEC meeting actually going on this week, so we have news about that that's relevant to what's going on there. So, when you're looking at a lot of these oil stocks, whether it's Exxon, a super-integrated company, or especially some of these independents, don't think it's an area where we would go bottom-fishing right now.

Moving on, kind of, away from oil stocks, clearly this is an area that's out of favor, but if you go on the other side of the coin, companies that touch the renewable energy space are drawing incredible amounts of attention and hype this year. These stocks have been on incredible runs. And so, we've gotten a bunch of questions from folks about some of these high-flying stocks that we'll talk about here in a second. Before we tackle some of those, Jason, if you see a stock like that, that's just going on a crazy run over the last year or so, how does that affect your interest in investing in the stock, do you like to look at the 52-week high list for stocks to check out?

Hall: I do, because I've learned from David Gardner, winners-win, right. I think, if you could sum up his investing philosophy in two words, it's winners-win. But then you have to apply context to that. A winner isn't just a stock that's gone up 100% or 200% or 300%, [laughs] in some of these cases like 1,000% this year, there has to be the context of a wonderful business that underlies it, that is also executing incredibly well. The business is growing, it's disrupting somebody, it's taking share, it's establishing new markets, it has wonderful management that has skin in the game and all of those other attributes that make it a Rule Breaker, and also the stock has gone up, so that's what a winner looks like.

A winner isn't just an alternative fuels idea stock or, I don't know, Plug Power, FuelCell Energy, right. It's a stock that's gone up, like, you know it has a comma in the percentage [laughs] that it's gone up over the past year, but then you go back to when the company went public and it's still down. That's a very different thing entirely, and that's where you have to be an investor versus trading on momentum and just following squiggly lines on a screen.

Sciple: Yeah, so the way I would say it is, and I'd agree with David Gardner and this idea that, it's probably you're going to find better outcomes over time by shopping on the 52-week high list and shopping on the 52-week low list. Part of that is because winners-win. But that should just give you the list of stocks to maybe take a poke around at, then you have to poke around at the underlying business and see how it performs, just like we talked about earlier. Just because Exxon is down, whatever, +40% this year, doesn't mean it's going to magically snap back to where it was. Today, we want to look at the underlying performance of the business and how it's doing. So, as we talk about that, one of these areas that we've seen just a massive amount of interest in this year, where the stocks have been on incredible run, is this fuel cell space, companies like Plug Power, Ballard Power, and Bloom Energy. Jason, when you take a look at this space, what stands out to you, what should investors be paying attention to? Are they on that list of wonderful businesses to buy at 52-week highs?

Hall: I think, in general, not exactly, because here's the bottom-line, so first of all, I think this is important, the economics of hydrogen are starting to shift, because the biggest problem with hydrogen has been making hydrogen in a cost-effective manner. There's lots of great technology to do it, but there's also the dirty little secret that most of it is steam-formed from hydrocarbons. Hydrogen [laughs] isn't really clean right now, you know, like, well over 90% of it comes from this steam-forming process of hydrocarbons, mainly natural gas. But the economics are shifting, because wind and solar costs are falling enough that you can use the electricity from that to, I guess, with electrolysis to produce hydrogen. That's starting to change the game.

But for the most part, I think the industry is still littered with these idea stocks that aren't necessarily there yet. The stocks I think have gotten grossly far ahead of the business. And I mentioned FuelCell Energy before, I'm going to mention FuelCell again. The stock since the beginning of the year, as of today, December 3rd, is up 1,220%, over the past 12 months. This year it's up about 200%. But if you go back to when the company went public, back in the '90s, the stock is down 96%. This is not a company that has been a big winner that has continued to win, this is a company whose management -- and there's a lot of the companies in this space that are the same, so I'm not indicting FuelCell's management specifically, but in general, these companies in this industry have been really good at one thing, and that's getting investors to kick in more capital that they've burned through trying to build a business, before they go back to capital markets and ask investors again for more capital to take [laughs] and burn through; rinse and repeat. The industry has never gotten to scale. And I think a lot of these companies are still riding on the story and not necessarily a meaningfully valuable business. Maybe that's starting to change for some of them.

Sciple: Yeah, I would agree with that, Jason, you're looking at most of these companies' losses since inception, so I wouldn't put these companies in the category of these are businesses that have been super-incredible winners over a history of time. Again, I think fuel cells have an application, but when you look at the underlying economics, this isn't something that gets me super-excited to invest in. And I think, you know, you can look at the chart, it's one simple thing to do, if the chart just looks like somebody flipping you off, kind of, where it's just like one big huge spike and then it goes flat, generally, now there are exceptions, but generally, that's not going to be a good investment. So, just keep that in mind when you drill into the actual economics of the business and how it's performed historically rather than just look over the past 12 months or so.

Hall: Yeah. And I do want to call out Bloom Energy. This is one that I've invested in, so, Bloom Energy, the ticker is BE. the shares are up about 225% this year, so it's one of those that's gone up, but it has been a little bit of a winner, this is a more recent public company, its revenues are substantially larger than any of its peers in the space. And I think it's one that is positioned to be a big winner from the shift of economics, because I think they're focused where the future for hydrogen is probably going to be the strongest, and that's in utility scale, and utility scale power generation, and heavy-duty transportation application.

Wind and solar are great, but they're not reliable, they're not predictable, right. [laughs] Like, we can't just turn up the wind when we hit peak demand, we can't just make the sun shine brighter when we have peak demand. Energy storage technologies are important. Battery costs are falling, but there are a lot of challenges there in terms of access to the materials to meet the kind of global demand for storage we're talking about. I think hydrogen is going to be a great place for storage, because the energy density is good, and you have the ability to leverage wind and solar to store energy in the form of hydrogen, and then you can use that hydrogen to produce electricity as needed. I think also hydrogen could be a big winner, like in maritime transportation, like container ships, where you have, really, this massive industrial type of power output that you need, and a big container ship, just like a Class 8 heavy-duty tractor trailer, you can't just stick tons and tons of batteries, literally tons of batteries, because you need that space for whatever the good is that you're trying to transport. So, you have a lot better energy density with hydrogen.

So, I think it can win in those spaces. And Bloom is really, really well-positioned in that utility scale phase, they've got some really, really big deals in Korea, specifically there's a lot of shipbuilding that happens in Korea. Korea is really focused on energy security. You think about where the Korean peninsula is, they don't necessarily have the most friendly neighbors around them. So, having access to energy is really important. And I think that's the kind of thing where Bloom Energy is really positioned to win. It's also gone up 200%, it trades for 4X sales. FuelCell Energy, Plug Power trade for 24X sales. Ballard Power trades for 40X sales. So, its business is growing, it's generating higher revenue, talking about Bloom, it also trades for a much more reasonable valuation, even with the stock having been a winner, so to a certain extent the market is rewarding it more appropriately based on how its business has performed.

Sciple: Good deal. Yeah. One other stock I wanted to talk about briefly, we've gotten a ton of questions about it is Blink Charging. Ticker BLNK. This is another one that's performed incredibly well this year, up over 1,100% in 2020. It's another one, though, where you need to drill into the actual financials of the company. So, it's playing this really hot trend, electric vehicles, electric vehicle charging, that whole space has really been hot this year. But if you actually drive into the business, it's been public for over a decade, but it has never generated a positive net income or positive operating cash. Just reached its highest stock price since 2017. Why is 2017 an interesting date for it to reach its highest stock price then? Well, they did a 50-for-1 reverse stock split in August of 2017; generally, not something you want to see historically. You look at trading multiples, 56X next year's revenue, per S&P Capital IQ. If you want to do a different valuation metric, look at valuation per charger. So, Blink Charging is an electric vehicle charging company, offers services where different retail stores can buy chargers and use them on their premises, or they have, kind of, a Charger-as-a-Service model where the retail store will pay them a percentage. They get back exclusive rights to charge at some of these locations which helps them.

But again, if you look at the valuation here, so at the end of the third quarter, Blink had deployed 15,716 charging stations, if you take a look at Blink's market cap today, $700 million-something, that values Blink at $47,213 per charging station. Just for context, most of the things that are going to be plugging up to these starting stations are going to be electric vehicles you would think, you get a new Tesla Model 3 for $37,990. So, for less than what one of these charging stations is getting valued by the market. If you look at the year-to-date 2020 $3.4 million in revenue on $19.3 million in SG&A. So, really not producing profits.

Then lastly, if you look at -- a lot of times, folks at The Motley Fool like to see a CEO with a large ownership stake, we do see that in this case with CEO, Michael Farkas. However, I was looking through their proxy statement, this Form 14A that you can get from the SEC that tells you how management is compensated and that sort of thing, you see lots and lots of related transactions between the CEO, Mr. Farkas, the Blink Charging and his consulting organization. If you look at his compensation, he gets other compensation as a result of some of those deals. He got $2.379 million in other compensation in 2018. If you look at revenue for the business in 2018, that was $2.6 million. [laughs]

If you look at management is getting, kind of, a compensation that exceeds revenue for the business, not a great look. If I was going to invest in EV charging, ChargePoint is coming public via a SPAC. [Special-Purpose Acquisition Company] Has its own issues when it comes to EV charging, because, you know, generally not going to be a super-high-margin business. Selling electricity, the analog is to gas stations, and if you're familiar with how gas stations make money, most of the money made at a gas station is via the convenience store, not via selling the gasoline. And so, in this case, there's no convenience store, so that adds some problems. But if I were to invest in EV charging, I think ChargePoint is a more interesting company, a larger network, that sort of thing. So, that's kind of my rundown on why Blink is, you know despite the really strong performance is not something that would be on my watchlist today.

Jason, any thoughts on that subsector, in general?

Hall: Yeah, just No. 1 on Blink Charging. You look at the revenue record alone, I mean this is a company that, you know, [laughs] the company has never done more than $4.5 million in revenue over any four consecutive quarterly periods. And revenues over -- if you go back to, like, 2015 through the end of last year, revenues fell. This isn't a company that has established itself as a leader and then has consistently started generating better and better results and growing revenues every single year. Revenues have grown, I will give the company credit, revenues have grown in 2020, but from an extremely low point, and the market is almost valuing this company at $800 million. It's never done $5 million in sales in a single year. And last year it gave essentially half of its sales to its CEO and related parties of the CEO. There are so many red flags here.

And but here's the other one from an industry perspective, to look a little bit larger, this is going to be a really tough place to be a pureplay and win, really tough place. Tesla does its own thing. You have companies like Solaredge that are building equipment for the EV recharging market, there are big industrial companies that have lots of experience in this sort of infrastructure that are going to be players in it. It's going to be really hard to win in what is essentially going to boil down to being a commodity product, I think. So, yeah, I agree with you, it's ...

Sciple: ... yeah. So, again, I think the big takeaway is, on all these, whether they are one of those that are you want to bottom-fish on or whether it's a company that's been flying, look at the financials and poke into, kind of, what the management's incentives are and those sorts of things. Because, you know, if you just zoom-out a little bit, you know, from this near-term how the company has been performing because of whatever subsector is getting a lot of hype, it can give you a little bit more clarity on what the long-term trajectory is of the business and whether it's something that you would be excited about being invested in over a 5- or 10-year period, which is what we advise folks, you know, the timeframe we advise folks to think about when investing.

We've kind of, you know, beaten down, I guess, [laughs] a few of these companies, Jason, so to close it out, do you have a company that is up big this year that you still think is a great buy, and if so, can you tell us what it is and why?

Hall: Yeah. I'm a big fan of TPI Composites, ticker TPIC. And that's up -- let's see, I'm not sure exactly how much it's up this year, I haven't looked at it today, but it's up well over 100%. Now, here's why I like TPI Composites right now. First, the stock is up big, but if you look at the past five years, revenue is up almost 180%. There you go, it's a growing business, it's actually a meaningfully growing business.

Now, operating cash flow; positive operating cash flow, unlike a lot of these companies that are, in some cases, they're actually spending more on their operations than they are even generating in revenues total. I mean, it's just their businesses are so completely upside-down.

Now, here's what I like about the business looking forward, it's a major supplier for wind turbines, the actual blades for the wind turbine makers. Basically, it's a supplier to all the largest non-Chinese wind turbine makers in the world. It's a big contract manufacturer, it plays a really important niche role making it so that the turbine makers can compete in markets where it might not make sense for them to build a blade factory, just because they're not going to get enough volume of sales in those areas. And geographically, this is a tough business, you have to be, these blades are huge, right, they are 100 meters long, you can't just build them in Denmark and ship them to Southeast Asia, or ship them to Brazil, you have to be local because of the shipping logistics implications there.

So, there's optionality too. Because they're really good at composites, electric vehicle makers that are looking to build strong, light vehicles are using -- I think, Workhorse is an example, a company that uses TPI Composites to make frames, to make bodies for its vehicles. So, their manufacturing expertise actually gives them some optionality in other very high growth industries.

And here's a really cool thing, trades for about 1X sales, so you start thinking about valuation multiples, this is a stock that's gone up substantially. And 1X sales for a manufacturer, which [laughs] a lot of these companies essentially what they boil down to is they are manufacturers. 1X sales is fairly reasonable, especially for a growth business that's not going to have massive margins, but at scale can kick off a lot of operating cash, it's a very, very reasonable price for, I think, a great business that ticks off a lot of those other boxes about what a winner really looks like.

Sciple: Awesome. Yeah, so for mine, I'm going a little bit away from the energy space, but if anybody follows me on Twitter, they know Match Group is one of my favorite stocks on the face of the planet. Just, kind of, a rundown for folks that aren't familiar with the company, you know, they are an online dating provider, their namesake platform is Match, but the main driver of the business, a most significant winner for them, has been Tinder, which has really, kind of, changed the game when it comes to online dating. Online dating really took off when the internet first spiked up and then really had a second spike on mobile, and Tinder was really the winner app there.

If you look over the past five years, Match Group direct revenue was compounded at a 23% compound annual growth rate, from $225 million to $628 million. Tinder has performed strongly, but they also have other platforms, like, Pairs, Plenty of Fish, OkCupid, the namesake Match, Meetic, and then the other one that's really exciting right now is Hinge, and that's one that's really been performing well this year.

Match Group acquired Hinge a couple years ago, and at the time, app downloads were actually declining. Since Match has taken Hinge on board, their downloads are up 83% year-to-date. ARPU, Average Revenue Per User, it's an important metric for lots of businesses, up more than a 100% year-over-year in the third quarter. Direct revenue growth for Hinge, up 200% year-over-year in the third quarter. So, really firing on all cylinders.

When you look at Match Group's competition in online dating, they really own pretty much all the platforms of note, with the exception of Bumble. And when you think about it, online dating, especially today in 2020, is essentially the only way you can date right now. One of my favorite charts on the face of the planet, when it comes to, kind of, bullishness on online dating, you can look at, kind of, the share of couples that meet via online dating, it's basically been going straight up for the past 20 years or so. And of course, that's been pulled forward by the pandemic.

And so, you look at Match today, not cheap, it's valued at 60X forward earnings, 14X forward sales. But when you look at the positioning for the business ...

Hall: ... whoa! whoa! whoa! Did you say earnings? So, you're talking about a winner that has ...

Sciple: That's right, there are some earnings there, there's that ...

Hall: That's crazy, Nick, that's crazy.

Sciple: Well, that's true. Yeah, so we do have earnings here. And again, this is a business where online dating has had strong, strong growth over the past, again, 20 years, only continuing to grow moving forward, big opportunity outside of the U.S. and outside of some of these more developed countries. You look at some places in the Middle East, this can be one of the only times in history that females in some of these countries have had, you know, real affirmative control over their dating life and those sorts of things. So, really lots of optionality for Match, this online dating space is growing, and lots of opportunities outside the U.S.

So, stock is up 79% since it split out from IAC over this Summer. And it's valued at $37 billion. When you look at the positioning of the company, dominating online dating, this core relationship that people have, you know, getting married, all those sorts of things. It's valued at $37 billion today, I don't know what it's worth, but I think it's worth significantly more. When you control dating, something that's so important to just how people live their lives, I think that's got to be a $100 billion business, and we'll see where it goes. The company is just firing on all cylinders, and hopefully they can maintain their momentum.

Hall: Yeah. You know, honestly, I've never bought this company, and I have listened to you pound the drum on it for a year now, and I've never invested, it might be time for me to get a little skin in the game here.

Sciple: Well, I think one thing that's interesting with Match, and this is not an original idea, but it's one of those few companies that is actually a COVID stock and a reopening stock. So, when everybody gets locked down, everybody is like, well, I have to go on Match, or whatever, on Tinder, that's the only way I can find potential dates or matches, and when everything opens up, hey, guess what, I get to actually go back to the restaurants, and the bars, and the movies, and all those sorts of things, and Match is someone that can drive demand to some of these places, that's one potential optionality for revenue.

We talked about, I had Dan McMurtrie from Tyro Partners on, I think it was back at the beginning of the year, we talked about Match. One of the things they talked about, this idea that, hey, maybe they can make a deal with restaurants where it says, hey, we're going to go on a date here, the restaurant will give you a coupon, they give a kickback to Match, lots of optionality for them to bring people into the real world with these matches once things return to normal. I think this company has got a lot of ability to keep growing, and I think it will, clearly, by what I'm talking about.

Jason, any last thoughts before we go away on buying the dip, buying companies on 52-week highs, and how to think about looking for stocks that are appealing to invest in?

Hall: I think the only thing I want to do is just close by emphasizing what we were talking about, about, you know, it's one thing to buy a good business that the stock is down because of temporary reasons versus bottom-feeding the mediocre businesses that are more likely to continue to struggle, or maybe it's just too hard to predict what business is going to look like in the future, and at the same time, emphasizing the difference between a winner and a stock that's just gone up because everybody is very interested in whatever industry that it's in, whatever buzzword is attached to it, while the underlying business itself hasn't really earned anything. Those are two really, really important concepts to have that nuance that I think will help people, I think it's, you know, it's going to help people make more money and avoid losses, [laughs] which is the other side of making more money.

Sciple: Absolutely. At the end of the day, the stock is a reflection of the business over the long-term, and so, we want to look at and see how the business is performing, what its financials are doing and what its prospects are in the future. And that's what we try to help folks out with on the show every week. Jason, it will be exciting to do that again soon next time I have you on. Thanks for joining the show, as always.

Hall: Always good to be on with you, Nick. Good times.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for mixing the show. For Jason Hall, I'm Nick Sciple, thanks for listening, and Fool on!