Two weeks ago, on Aug. 3, Match Group (MTCH 0.34%) released its second-quarter 2021 earnings numbers. The online dating company continues to grow its financials even while facing headwinds from the COVID-19 pandemic, and is setting itself up to grow over the next few years and beyond. However, it looks like Wall Street was not excited about Match Group's performance, with the stock now down 15% just in the past month. This sell-off gives investors the chance to buy a high-quality business at a discount.

Here are a few reasons you should be bullish on Match Group after its latest earnings report.

A person looking at a dating app deciding to say yes or no.

Image source: Getty Images.

The results

In Q1, Match Group's revenue grew 27% year over year to $708 million. Payers, Match Group's metric that encompasses the number of users who pay for services across its platforms, grew 15% to 15 million in Q2. The majority of people using dating apps are currently doing so for free, but Match Group is slowly convincing more users to pay for extra services and perks over time. 

Operating income grew only 7% in the period to $210 million, but the company still put up a 30% operating margin in the period, showing how profitable these apps can be even while growing sales at a double-digit rate. Match Group also completed its acquisition of Hyperconnect in Q2 for $1.75 billion. Hyperconnect, based in South Korea, owns a video chat application with expertise in artificial intelligence filtering and language translation.

As it brings Hyperconnect under its umbrella and rolls out its video technology to other apps, Match Group management is guiding the new subsidiary to run at around breakeven through the end of 2021. This will bring down Match Group's overall profit margin in the short run, but if the acquisition is successful, it will be beneficial to the company in the long run. 

Tinder is still facing COVID-19 headwinds

Match Group's Q2 results were impressive, but they look even better when you understand that Tinder, the company's No. 1 application, is still facing demand headwinds from the COVID-19 pandemic around the world. Tinder's direct revenue grew 26% year over year in the period, hitting $399 million and making up the majority of Match Group's overall sales.

However, in North America and Western Europe, when economies started opening up in Q2, Tinder's a la carte revenue was up around 40% compared to the start of the pandemic, while the rest of the world's a la carte revenue was up significantly less. With a la carte revenue correlating with reopenings around the world, that indicates that Tinder is still not growing at its full potential. Once the COVID-19 pandemic ends, which may take longer than expected with the delta variant, Tinder's business could start growing even faster.

Tinder a la carte revenue for Q2 2021.

Image source: Match Group Q2 letter to shareholders.

Emerging brands growing rapidly

Tinder is the majority of Match Group's current revenue, but a lot of its growth is coming from its emerging brands, which are led by relationship-focused app Hinge. In Q1, these emerging brands grew sales 71% year over year to $103 million, which was on top of 65% growth in 2020. Direct revenue at Hinge, Plenty of Fish Live!, and its niche demographic swipe apps is on pace to hit $300 million in 2021, which would be up almost 10 times from 2019 when this group did only $34 million in revenue. Hinge, the largest of this group, grew revenue 150% in Q2 and management says it is still on pace to more than double revenue in 2021.

Thoughts on valuation

Most people can agree Match Group is a quality business, but a lot of investors get hung up on the valuation. With a market cap of $38 billion, the stock trades at a forward price-to-sales ratio (P/S) of 12.6 based on its full-year guidance of $3 billion in revenue. This is expensive compared to the market average, but investors underestimate how much Match Group can grow from here, and how much its profit margin can expand.

It is exploring an in-app virtual currency at Tinder, which would help with profit margin by making its business more vertically integrated. Match Group also pays a large part of its revenue to the app stores. While not a guarantee, it looks like these app store fees could be legislated lower, or at least regulated to allow Match Group to explore different avenues for payments (like its own virtual currency). 

Match Group is already generating 30% operating margin with all these fees, while also investing to grow its business. This indicates that the company's profit margin could expand much higher over the next few years. Couple that with the top-line growth of all its applications outlined above, and a market cap below $40 billion might look like a bargain five or 10 years from now.