We are officially in the heart of earnings season, and one stock I was watching closely is Match Group (MTCH 2.50%). The online dating player and owner of the popular Tinder and Hinge dating apps is going through a revamp, with new CEO Bernard Kim taking the reins in May 2022. The company reported its fourth-quarter 2022 results on Jan. 31, missing analyst estimates for revenue and forward guidance, which caused the stock to fall in the following days.
Even though the financials don't look great right now, I still think investors are missing the big picture with this business. Here's why Match Group stock is finally set up for a rebound after disappointing investors yet again.
Q4 results: Revenue and payers decline
In Q4, Match Group's revenue declined 2% compared to 2021, coming in at $786 million. The number of payers -- a key performance metric that measures the total amount of paying users across all of Match Group's dating services -- declined by 1% from the previous year.
These are huge slowdowns from prior periods when both revenue and payers were growing at a healthy clip. For example, in Q4 2021, Match Group's revenue grew 24% and payers grew 15% year over year. Investors likely expected this growth to continue in 2022. It's no surprise, then, to see the stock down almost 60% over the last 12 months after revenue growth ground to a halt.
So what caused this massive slowdown at Match Group? When Bernard Kim came in as CEO of the company in the late spring of 2022, he did not like what he saw at Tinder. Subsequently, he got rid of the management team and installed himself as the leader of the division in order to get the application's product development, which he felt was lacking focus and execution, back on track. To do so, Tinder was going to have to sacrifice a few quarters of revenue growth while this new team got its footing.
Since Tinder makes up more than 50% of Match Group's overall revenue, this shakeup is the main reason for the big revenue slowdown in the second half of 2022.
On top of the reorganization at Tinder, Match Group faced major foreign exchange headwinds in 2022. As a U.S. business that generates a ton of revenue internationally, it faces revenue headwinds when the dollar appreciates versus other currencies, which happened in 2022. In Q4, revenue would have actually grown by 5% year over year if you exclude these currency headwinds.
Why growth is set to rebound in 2023 and beyond
While 2022 was ugly, I think Match Group is poised to start growing its revenue again in 2023. First, it looks like the currency headwinds peaked in Q4 2022, with currencies like the euro, British pound, and Japanese yen all well off their lows versus the U.S. dollar in early 2023. This will not only help Match Group's revenue but also its profitability, as the majority of its operating expenses are in the United States.
Second, it looks like Kim and the new leadership team are on the right path to get Tinder back to growth and expand Hinge (the second largest app in the Match Group portfolio) worldwide this calendar year.
In the Q4 earnings letter, Kim laid out Tinder's roadmap for 2023, which includes expanded and personalized discovery features, new profile features, and advertising. The segment is also set to launch a new brand marketing campaign in early 2023. Some of the new features already started to drive a la carte revenue growth at the application.
The Hinge app is starting to roll out across Europe and is set to go into some Asian markets later this year, with its users growing nicely every month. It is also about to launch its new premium monetization feature called HingeX to drive revenue growth across its core markets.
Management expects Hinge to add $100 million in total revenue for Match Group on top of the $284 million it generated in 2022, with more growth yet to come in the next three to five years.
For the full year 2023, Match Group expects to grow revenue by 5% to 10% over 2022 after its Tinder revamp goes into full effect in the second half of the year. Through 2024 and beyond, I think revenue growth can accelerate back to its historical range of 15% to 20%, given the huge opportunity left to expand both Tinder and Hinge outside of the core North America, Europe, and English-speaking markets.
The stock is cheap at today's price
With how far the stock has fallen, Match Group now trades at a cheap multiple to cash flow. In 2022, the company generated $918 million in free cash flow, if you exclude a one-time litigation settlement to the founders of Tinder. At its current market cap of $13 billion, the stock trades at a trailing price-to-free cash flow (P/FCF) of 14.2, which is well below the market average.
If the business reignites and accelerates back to double-digit top line growth, annual free cash flow will end up much higher a few years down the road. For a company with little competition in a fast-growing sector, now looks like a great time to buy some Match Group stock.