The best investing theses are simple. A simple thesis can come from identifying a company serving one or two basic needs for customers with predictable product demand. Examples of these include Amazon (customer convenience when shopping), McDonald's (ready-to-go food), Starbucks (daily coffee), and many other long-term stock winners.
One less-talked-about stock within this category is Match Group (MTCH -0.84%). The company serves a core need/want around the world (romantic relationships), giving it predictable demand from its customer base each and every year. Here's why Match Group is the one growth stock to buy in 2022 and hold onto for the next decade.
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What is Match Group?
Match Group is a portfolio of online dating services. It was started in the 1990s with Match.com and has acquired and built its way to dominance in the category over the last few decades. It currently owns 14 different websites and applications. These include the No. 1 application in the online dating category (Tinder), the fastest-growing (Hinge), and culturally focused dating apps like BLK, Chispa, and Hawaya.
Outside of online dating, Match Group has recently forayed into more social applications with its acquisition of Hyperconnect for $1.8 billion in 2021. The company runs two applications, called Azar and Hakuna Live, that both focus on social discovery and online connections, but with less of a focus on dating than Match Group's core properties. It will be interesting to see what, if anything, comes out of the Hyperconnect purchase over the next few years. However, right now the Match Group thesis revolves around its dominance in online dating.
Match Group makes money by charging users of its applications for unlimited likes, boosted appearances, and other advanced features to help them along their online dating journey. Since these are all digital interactions, Match Group has very few costs associated with these subscriptions, giving it high gross margins. In fact, even though it pays out 20%+ of its revenue to mobile app stores run by Alphabet's Google and Apple, Match Group's gross margin was 72% through the first nine months of 2021. Excluding app store fees, the company likely has gross margins north of 90%.
Durable growth of revenue and profits
Given the company's incredible unit economics, Match Group has been able to grow its top line while also generating profits and cash flow over the last few years, a rare feat in today's business landscape. In third-quarter 2017, Match Group had $343.4 million in revenue, $91 million in operating income, and an operating margin of 26.5%. Four years later, in Q3 2021, Match Group did $801.8 million in revenue, $221 million in operating income, and had an operating margin of 27.5%.
So over four years, Match Group was able to compound revenue at 23.6% while also maintaining an operating margin north of 25%. This indicates to me that once this business matures over the next decade, profit margins should expand well north of 30%, as the company will have to spend less on sales and marketing, research and development, and other growth expenses that are holding back margins right now.
But growth shouldn't slow down anytime soon, at least not for a few years. According to Statista, user penetration for online dating will only be 5.4% in the U.S. in 2022, leading to expectations that the category should grow by 6% to 10% over the next few years. Match Group should be able to take advantage of this growth. Last quarter, paying users grew 16% year over year across its services to 16.3 million.
A lot of this current growth is driven by Tinder, which has 10.4 million active paying customers growing 19% year over year. There's no reason to expect growth at Tinder to slow down, but over the next few years the star of the portfolio may turn out to be Hinge, a relationship-focused dating application with an older audience than Tinder. In Q3, revenue growth at Hinge was north of 100% (management doesn't give exact numbers). If this continues, the application will become a much larger portion of Match Group's overall business in just a few years' time.
Price is reasonable if you zoom out
A lot of investors shy away from Match Group because it trades at a premium earnings multiple. With a current market cap of $34.5 billion and trailing annual operating income of $844.4 million, the stock trades at north of 40 times operating income. This seems expensive, but it is only slightly more expensive than the S&P 500 as a whole, which has an average operating income multiple of 34 right now.
Zooming out, if you believe Match Group can continue putting up 15% (or more) revenue growth while expanding its profit margins, this earnings multiple should come down rather quickly. For example, let's say Match Group puts up 15% revenue growth and expands its operating margin to 30% over the next three years. At the end of that time period (January 2025), the stock will trade at approximately 26 time its operating income, or below the market average.
Unless you are concerned about steep multiple compression, now could be a great time to buy Match Group stock, as it is a company with a long runway to grow trading at a reasonable valuation.
