We are at the tail end of earnings season as many investing favorites have reported their latest financial results. The S&P 500 is up almost 10% in the past month, indicating that Wall Street has generally been pleased with how the business world is doing. But that isn't the case for every company. For example, online dating app company Match Group (MTCH +3.45%) reported poor revenue growth and guidance, leading investors to sell off the stock.
Are Match Group's best days behind it? Is it time to sell your shares? Let's take a look.
Weak growth and poor guidance
Match Group reported earnings on Aug. 2. Revenue grew 12% year over year in the quarter to $795 million, which missed analyst estimates of $804 million. While it's still growing at a double-digit pace, Match Group has historically grown its top line at close to 20% or higher.
A lot of this slowdown is coming from foreign-exchange headwinds. Match Group reports its financials in U.S. dollars but operates a global business in many different currencies. When the U.S. dollar appreciates vs. other currencies -- as it is doing right now -- it is a headwind for revenue growth. Excluding foreign-exchange dynamics, Match Group's revenue grew 19% year over year in the second quarter.
The most disappointing part of the report was revenue guidance for the third quarter. Management is now expecting revenue of $790 million to $800 million -- or essentially flat growth year over year.
So what gives? Why is Match Group's revenue growth slowing so quickly? On top of the bad foreign-exchange headwinds, the company is in a transitional period with Tinder, its most important dating application.
New CEO revamping Tinder
Match Group got a new CEO during the second quarter. His name is Bernard Kim, and he comes over to the dating company from Zynga, the mobile games publisher that just got acquired by Take-Two Interactive. In his first months at the company, Kim traveled around to all of Match Group's different product teams to get the lay of the land. Apparently, he did not like what he saw with Tinder.
In his inaugural shareholder letter, Kim announced he was firing Tinder's CEO. He is currently looking for a replacement and has brought in an all-star cast of executives both from within Match Group and from other industries to help steer the ship in the right direction. According to Kim, Tinder's old team failed to execute various monetization and product initiatives, which will likely mute the app's revenue growth in the second half of 2022. Seeing as Tinder has 10.9 million of the 16.4 million total paying users across Match Group's portfolio, a slowdown in revenue growth has a big impact on Match Group's consolidated financials.
With the new team in place, Kim hopes Tinder will get back to its historical revenue growth rate of closer to 20% some time in 2023.
NASDAQ: MTCH
Key Data Points
Investors should stay patient
While misfires, employee turnover, and poor revenue guidance are never good, investors should take the long view with Match Group. Only 43% of adult singles in the U.S. and Europe have even tried a dating app with many other global regions at even lower penetrations. This provides a long runway for Match Group to grow paying users across its various applications like Tinder and Hinge. With minimal competition outside of Bumble, Match Group is poised to continue dominating the industry.
At a market cap of $18.7 billion, Match Group trades at a price-to-free cash flow (P/FCF) ratio of 22.5 based on its 2021 numbers, which is right around the market average. Its 2022 financials might be disappointing, but if the company can regain its momentum, the stock could become quite the bargain. For this reason, I think it is smart to hold your shares of Match Group right now and see if the new CEO can get the company moving in the right direction again.
