After losing more than 12% during 2021, Match Group (MTCH -0.31%) entered the new year hoping to rebound. However, 2022 hasn't gotten off on the right foot either, as shares have lost an additional 15% year to date. In a slight change of fortune, the company's stock popped 5% after reporting fourth-quarter earnings on Feb. 1.
The maker of apps like Tinder and Match has big plans in store for 2022, but management is wary of app store headwinds and the effects of the omicron variant . Are these concerns valid, or is Match Group set to have a fantastic 2022?
The industry leader with a strong pipeline
The crown jewel of Match Group's dating app empire is Tinder. The app is the most popular dating app in the U.S., ranked as the fifth-highest grossing app on Apple's iOS store. It pulled in $1.7 billion throughout 2021 and accounted for 57% of Match Group's revenue. While Tinder's swipe feature was revolutionary when it was introduced, Tinder has evolved to include Tinder Explore. This new feature has been used by nearly 70% of users and includes features tailored for finding wedding dates and concert festival buddies.
Not just a one-trick pony, Match Group has other emerging platforms. Perhaps the most promising is Hinge, which grew its quarterly revenue year over year at a 90% clip and more than doubled its annual revenue when compared with 2020. The innovative app introduced a voice prompt feature that resonated with its audience. Hinge is only available in English-speaking markets right now, but international expansion is imminent, according to management.
Match Group is also exploring metaverse applications. CEO Shar Dubey shared her vision on how Match Group will tackle this coming revolution on the fourth-quarter conference call:
Imagine sort of a virtual club in the app where your digital self can walk around, check out live, different rooms. They meet others listening to the same music. You can strike up a conversation with someone. You can tap and check out their full profile. You can like them, message them later.
If Match Group can create a virtual reality like this, it could dominate the future of online dating.
Strong results, but with a large one-time expense
Examining the quarterly results reveals strength across the board. Quarterly revenue was up 24% year over year, and paying customers increased by 15% as well. Revenue per payer increased marginally at an 8% rate to $16.16. Its most profitable region, Asia-Pacific (APAC) and Others, increased its paying customer base by 36% to 3.4 million. The Americas region has 8.2 million paying customers, leaving plenty of room for Match Group to expand.
Management expects revenue growth between 15% and 20% for 2022, with the omicron variant and currency exchange (FX) acting as headwinds. With Alphabet's Google Play Store reducing the revenue cut it takes from subscription fees from 30% to 15%, Match Group expects a slight operating margin improvement.
During the quarter, Match Group agreed to pay $441 million to settle former Tinder employee litigation. As a result, Match Group saw an earnings per share (EPS) loss of $0.60. Subtracting the one-time expense reveals a healthy 34% net income margin. With a large settlement out of the way, the stock appears to be in good shape financially heading into the rest of 2022.
Two fierce headwinds
While Google's fees are being reduced, Apple's are not. Because Hinge users mostly have iPhones, Match Group expects to pay a full 30% on revenue generated through the iOS store. Several lawsuits worldwide are challenging both Apple and Google's ability to levy heavy revenue tolls on in-app sales. Should either company further cut their fees, Match Group will see a significant increase in profitability. However, there is no guarantee this will happen.
Another pressing issue is that Japan's COVID response measures throughout 2021 have significantly impacted Match Group's business. With the omicron variant dragging into 2022, management expects further headwinds. Once COVID measures are lifted, expecting above-average growth in the region isn't unreasonable.
Match Group faces two significant headwinds, but each could subside by year's end if COVID fades away and regulators force Apple and Google to reduce their fees. Whether or not these things happen this in the near term, long-term investors have a great opportunity to get in now while the stock price is depressed.
Putting a value on Match Group
As the chart shows, when assessed from a price-to-free cash flow standpoint, Match Group stock is far from cheap right now, but still in the realm of similar margin companies.
Match Group receives a premium valuation to the other two stocks in part because of its size: It is easier for Match Group to expand because it is a smaller, nimbler company. I can scoop up shares of the company confident in its 28% full-year free cash flow (FCF) margin, which shows that Match Group is a very efficient business. Neither Alphabet nor Apple, two of the greatest businesses on the market, can match Match Group's FCF margin. Theirs sit at 26% and 27%, respectively. Match Group can use its cash flows to pay down outstanding debt or reward shareholders later on, much like Alphabet and Apple have in the past.
Long-term investors who can ride out the near-term volatility have the chance to buy a great stock down 30% from its all-time high. I think now is as good a time as any to swipe right on Match Group stock.