Bumble's First Acquisition Raises 3 Red Flags

Bumble (BMBL 1.39%) recently agreed to buy Fruitz, a French dating app that lets its users express their intentions with four fruit-based metaphors: cherries, grapes, watermelons, and peaches.

In a press release, Bumble says Fruitz "has seen rapid growth across France, Belgium, Netherlands, Switzerland, Spain, and Canada" since its launch in 2017, and that it's "particularly popular" with Gen Z users. Bumble didn't disclose the terms of the deal, which marks the company's first acquisition.

On the surface, Bumble's acquisition makes sense. It only operates two main apps, Bumble and Badoo, while its larger competitor, Match Group (MTCH -0.19%), owns more than a dozen dating apps. Adding a third app to its portfolio could widen Bumble's moat and enable it to reach more users.

However, the deal also raises three red flags about Bumble that can't be ignored.

Image source: Getty Images.

1. Bumble needed to buy more growth

Bumble ended the third quarter of 2021 with 2.89 million paying users across its two main apps, which represented 5% growth from a year ago.

By comparison, Match's paying users rose 16% year over year to 16.3 million in the third quarter and grew 15% to 16.2 million in its fourth quarter. It's a bright red flag when a larger competitor is growing at a much faster rate.

Bumble's growth has also been decelerating on a sequential basis, as the chart shows.

Data source: Bumble. QOQ = Quarter over quarter.

Badoo mostly operates in Europe and Latin America, but it seems to be struggling to compete against Match's Tinder and other popular dating apps. Bumble blamed Badoo's slowdown on the resurgence of the pandemic in certain regions last quarter, but that didn't seem like a major issue for Tinder -- which grew its paying users sequentially during the same period.

Therefore, it seems like Bumble announced its takeover of Fruitz -- which targets many of the same markets as Badoo -- ahead of its fourth-quarter earnings report because Badoo's numbers will likely disappoint investors again.

2. Fruitz probably won't add many paid users

Fruitz has been downloaded about 5.6 million times globally for iOS and Android devices, according to Sensor Tower.

But like Bumble and Badoo, Fruitz is a freemium app -- and we don't know how many paid users it actually has. Based on Bumble's comparable ratio of monthly active users (MAUs) to paid users, the number is likely very low.

When Bumble went public a year ago, it claimed to host 42.1 million monthly active users (MAUs) across both of its apps as of September 2020. Bumble stopped disclosing its MAUs after its public debut, but its growth trajectory in paying users suggests that number is still below 50 million -- so it's likely that only 5% of Bumble and Badoo's MAUs are actually paid users.

So even if every single download of Fruitz netted a new MAU -- and 5% to 6% of those MAUs were converted to paid users -- the acquisition would probably only add about 300,000 paid users to Bumble's ecosystem in a best-case scenario. Unfortunately, most of those gains could be offset by Badoo's ongoing decline.

3. Selling Badoo makes more sense

Bumble generated 71% of its revenue from its namesake app, which lets women make the first move, in the third quarter. Bumble also generated more than twice as much average revenue per paying user than Badoo. Instead of acquiring another European-oriented app to offset Badoo's slowdown, it would have arguably made more sense to sell Badoo and reinvest that cash into Bumble's overseas expansion.

In addition, Badoo faced sexual harassment and misconduct allegations under its previous CEO, which arguably tarnishes Bumble's reputation as a female-friendly brand. Therefore, divesting Badoo would have been a smarter financial strategy and better PR move than buying Fruitz.

Bumble ended the third quarter with $624 million in total debt but just $292 million in cash and cash equivalents. So unless Bumble is funding its takeover of Fruitz completely in stock, the acquisition will likely increase its leverage.

Stick with Match Group instead

I sold my shares of Bumble earlier this year when it became painfully clear that Match was the better online dating stock. Match is bigger, better diversified, and it's only growing at a slightly slower clip than Bumble.

Bumble's acquisition of Fruitz makes more sense than its experimental restaurant, online store for branded apparel, and murky metaverse plans. But that doesn't make it a great move -- and it raises troubling questions about Badoo and its ability to keep pace with Tinder and other dating apps.