The last 12 months have been tough for high-growth stocks. Even though they're putting up impressive revenue growth and profitability, many companies have seen their share prices decline by 30% to 40% or more since the start of 2021.
For long-term investors, these price drops can offer an opportunity to scoop up shares in high-quality businesses at a discount. Match Group (MTCH +2.01%) fits this definition to a T. The collection of online dating properties put up strong growth numbers once again in 2021, but as of this writing, its stock is down 32% in the last 12 months.
Here are four reasons to buy Match Group stock right now.
Image source; Getty Images.
1. A durable industry tailwind
Match Group's opportunity stems from the durable tailwind that is the online dating market. The number of online dating users in the U.S. has grown from only 28.9 million in 2017 to an estimated 49 million in 2021. According to a survey, only 36% of people aged 18 to 29 in the United States have used a dating app.
Plenty of people are already in romantic relationships, so this number will likely not ever reach 100%, but there seems to be a strong amount of blue ocean growth left for Match Group to go after. Internationally, online dating is likely in even earlier stages, since the majority of these services started in the U.S.
The company has taken advantage of this rising tide. From 2017 through 2021, Match Group grew its revenue at a compound annual growth rate (CAGR) of 22% while maintaining stellar adjusted operating margins of 35% or higher each year. This is in spite of the major headwinds it has endured over the last two years due to the global pandemic, which has hurt the overall dating market worldwide, with many people hesitant to meet others in person. Asian markets like Japan have been particularly tough ones during the pandemic, according to management.
If you aren't aware, Match Group owns the majority of online dating properties worldwide. These include the dominant dating app Tinder (the app accounts for over 50% of Match Group's revenue right now); fast-growing apps like Hinge, BLK, and Chispa; and older services like Match.com and OkCupid.
And if you're worried about competition, don't be. The only scaled competitors are Bumble (BMBL +1.19%), which owns the popular apps Bumble and Badoo, and Grindr, which focuses on serving the LGBTQ community. Yes, other upstarts could emerge over time, but as of now, the majority of consumer spending on online dating should flow to Match Group.
2. There's room for margin expansion
As mentioned, Match Group has incredibly strong profit margins, at 36% last year even after including its recent acquisition of Hyperconnect, which is running at break-even gross margins right now.
Long term, investors should expect these profit margins to continue inching upwards. For one, once Hyperconnect matures, it won't be a drag on Match Group's overall margins. But in general, dating apps are extremely asset-light, leading to very high incremental margins on every dollar spent by consumers. When someone buys an incremental "Super Like" or a subscription on Tinder or Hinge, the actual cost of that service for Match Group rounds down to zero, since the digital infrastructure is already set up.
As long as Match Group can manage its sales and marketing expenses and doesn't decide to accelerate its growth investments (which wouldn't necessarily be a bad thing), the company's adjusted operating margin should get above 40% within the next three to five years. If revenue continues to grow at 20% along with this margin expansion, that will be great news for Match Group shareholders.
3. An explosion in growth at Hinge
A big reason investors should be confident in Match Group's future revenue growth is the explosive growth over at Hinge. The relationship-focused dating app more than doubled its revenue in 2021 to $197 million as the company finally started monetizing its user base in the United States and other English-speaking markets.
It is still early days for the product, but management says it is on pace to become the second-most popular dating app worldwide within a few years' time, surpassing competitor Bumble. According to Match Group's Q4 2021 letter to shareholders, Hinge downloads accelerated in the last part of 2021, which will hopefully lead to even more strong revenue growth in 2022.
Hinge is currently only popular in English-speaking markets, a deliberate decision by Match Group, as it refined the product. Over the next few years, Hinge is planning on making a big push internationally. This will hopefully propel Hinge to even greater heights for Match Group in the next three to five years.
4. Potentially lower smartphone app store fees
Lastly, Match Group will benefit from any reduction in mobile app store fees at Google and Apple. This is not needed for Match Group to be a good investment over the next decade but would be a nice cherry on top. Whenever someone makes a purchase on an online dating application, Match Group is required to give 15% to 30% of the money to either Apple or Google. This makes up the majority of Match Group's cost of revenue, which brings down the company's gross margin to 72%, when it likely would be above 90% without them.
Worldwide, app store fees are under pressure from governments, and it is possible app store fees will be legislated lower in many markets. Every dollar Match Group doesn't have to pay to the mobile app stores is a dollar generated in profits. It is impossible to predict exactly what will happen with these app store fees, but if they get regulated lower, that would be great news for Match Group shareholders.
