Dating site operator Bumble (NASDAQ:BMBL) made a good first impression in its initial public offering last month -- its stock ended its first day of trading 64% above the IPO price, though it's pulled back a bit since then. Is this a good time to start a long-term relationship with the dating app company, or is the market's affection for it likely to fade?

Woman sitting on bed with laptop and swirling hearts

Image source: Getty Images.

A different dating style

Bumble's business is definitely desirable. It operates a female-friendly dating and lifestyle platform -- its well-known twist is that only the women on the site can initiate first contact with potential dates.

In 2017, industry leader Match Group (NASDAQ:MTCH) made the first move on Bumble, approaching it with a $450 million buyout offer. Match had been on a spending spree and was rolling up the online dating industry -- it owns the largest collection of sites, with brands including Tinder, Hinge, PlentyofFish, and OkCupid under its growing umbrella.

Bumble, however, spurned Match's advances, in part because it had bigger plans than simply being a dating app. While its mission of becoming a "preeminent global women's brand" sounds like fairly standard marketing-speak, it is energetically pursuing that goal. In 2016, it launched Bumble BFF, a platonic friend meeting site, and Bumble Bizz, a professional, career-oriented networking site. It also owns Badoo, one of the most popular dating apps in Latin America and Europe.

The new normal dating scene

The online dating industry has come a long way since the pioneering era of the early 1990s, when it was still a bit of a shock to hear about happy couples who had met via America Online. Today, a study by Tyro Partners suggests more than three-quarters of all relationships start online.

During the COVID-19 pandemic, of course, meeting online has become essentially the only way to make a romantic connection, since most in-person social outlets are closed or heavily restricted. People were already moving in that direction, but the coronavirus hastened the trend's pace.

This all bodes well for the industry, but it also means Bumble has a difficult task before it, because Match dominates the space through its various apps. That's why Bumble needs to differentiate itself, but its ambitions also carry risk.

Not just bumbling along

Bumble is preparing to release its first earnings report as a public company next month. According to its prospectus, over the first nine months of 2020, it generated $376.6 million in revenue, 38% of which came from Badoo and the rest from its namesake service.

Two years ago, Badoo was the primary contributor to Bumble's growth, accounting for 55% of total revenue, but that figure has declined steadily as Bumble's business gained traction.

Most of its money, though, is generated through premium subscriptions and in-app purchases, which is commonly the case for similar services. There were approximately 1.1 million paying Bumble users at the end of September -- a 29% increase from December 2019 -- while the number of Badoo users increased by 9% to 1.3 million.

Revenue per user, though, is declining at both apps as they grow, totaling $25.72 on Bumble and $12.54 on Badoo. Those metrics are down 4% and 9%, respectively, from the end of the prior year, but it's clear that the fastest-growing component of the company is also its most lucrative. 

Advertising and partnership revenues are still just a small component of the top line, though they represent potential growth opportunities for the dating site.

Still a risky business

Bumble is generating losses at the moment, so it needs to figure out how to better monetize its users. Maybe it's more concerned about first achieving a critical mass, but it's possible that its business model could limit its potential.

Because women are able to generate more matches than men, they don't need to pay additional money for premium services to boost their potential like men do. That could make it more difficult for Bumble to boost its users' in-app purchases. And though Bumble wants to be more than just a dating site, it hasn't yet made its core business profitable.

And even if online dating has been a growing phenomenon, in the post-pandemic dating world, shifting conditions are liable to slow the trend's inexorable climb.

Dating sites are a dime a dozen, but a serious swath of them belong to Match Group. Meanwhile, Facebook is making its own push into the space, and could become a significant competitor. Also, users can (and do) have profiles across multiple services, and can easily jump from one to another.

So is it marriage material?

Unless Bumble offers continued value enhancements to its community and finds better ways to market itself to the non-female half of the population, its growth potential might be limited.

For an investor wondering whether to swipe left or right on this stock, I think there's potential here, but Bumble has a lot to prove. I wouldn't put a ring on it just yet.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.