Predictions are difficult. But that is what you are doing when buying stocks, making a prediction about the future prospects of a publicly traded company. From my seat, this means you should either hedge your bets through diversification or only buy stocks when you have extremely high conviction about a company's future.
Recently, a company I have followed for years has seen its stock price take a precipitous fall, presenting an incredible opportunity for investors with the patience to hold on for the long term.
Here's why I think Match Group (MTCH -0.84%) shares will triple within the next five years with little downside, making it one of the best opportunities for stock investors I've seen since the March 2020 bear market.
Why the stock is 80% off its highs
Match Group is the leading dating app company worldwide, generating over half of the sector's annual revenue. Its products are led by Tinder, the No. 1 dating app in the world that generated $1.8 billion in revenue last year, or more than half of Match Group's $3.2 billion in annual revenue.
The proliferation of the application around the world has led to Match Group's revenue growing at around 20% annually for many years.
That is, until 2022. Last year, Match Group hired a new CEO from the mobile games industry named Bernard Kim. In his first shareholder letter after taking the reins, he surprised investors by firing the entire Tinder leadership team and stating that he was disappointed in the division's strategy. Even though the application has put up consistent growth for many years, Kim thinks the product has stagnated and believes Match Group needed to address that as soon as possible.
By eliminating its existing 2022 product roadmap, Kim intentionally drove Tinder to lower revenue growth in the second half of 2022 as the new team (which includes him as the Tinder president/CEO) got their feet under them and started addressing the looming issues. Along with foreign exchange headwinds, this led Match Group's revenue to only grow 7% in 2022, a huge slowdown from years prior.
Stagnating growth at Tinder, along with more executive reorganization, sent Match Group shares into a huge drawdown over the last 12 months, off almost 80% from all-time highs. While this might scare away a lot of investors, I think this presents a fantastic buying opportunity for a stock with big-time growth prospects and a cheap earnings multiple.
Growth from Tinder and Hinge
While the rhetoric on Tinder has been quite negative from management, the app still continues to grow. For example, in the fourth quarter of 2022, it grew revenue by 8% on a foreign exchange-neutral basis even with its product roadmap in limbo. Taking a longer view, Tinder is still in a great spot as the leading online dating application in almost every country around the world. From 2018 to the end of 2022, revenue more than doubled from $805 million to $1.8 billion even with a rising U.S. dollar.
Over the next five years, I think there is still tons of room for Tinder to increase users around the globe. Only around half of eligible singles in North America and Europe have tried a dating application, with usage rates much lower in places like Asia, the Middle East, and Africa.
These numbers have only moved in favor of dating applications since the adoption of the smartphone, and I see no reason this trend will stop anytime soon. Tinder can easily scoop up more paying users as the top dating app in all of these markets, driving revenue growth at Match Group.
On a longer time frame, I think Match Group's second-largest dating application called Hinge has huge growth potential. The app is already doing around $300 million in revenue a year but was only in English-speaking markets and had basic monetization subscriptions until the end of 2022.
Throughout the next few years, Match Group is launching new monetization products on the application and expanding it across Europe, India, and Latin America. I think this can drive growth at Hinge for many years and lead it to do well over $1 billion in annual revenue five years from now.
How the stock triples in five years
With the 80% haircut, Match Group shares now trade at a market cap of approximately $10 billion. Ignoring share dilution, that means in order for the stock to triple, the market needs to value the company at $30 billion five years from now.
How do we get there? Two ways: earnings growth and multiple expansion. Last year, Match Group did $1.1 billion in adjusted operating income, giving the stock a trailing adjusted price-to-earnings ratio (P/E) below 10. Over the next five years, driven by double-digit annual revenue growth at Tinder and Hinge, I think that Match Group's annual adjusted operating income can reach $2 billion.
The market's average P/E is 22. If Match Group's adjusted P/E climbs to only 15 five years from now and its adjusted earnings hit $2 billion, then it will have a market cap of $30 billion, or triple what it trades at today. At a market multiple, its shares would more than quadruple. These are not Herculean assumptions that can drive phenomenal returns for your portfolio in the years to come.
Of course, there is some downside with Match Group shares if Tinder's new leadership team can't fix the issues with the application. However, with the secular tailwind of online dating adoption at its back, I find it hard to see how Match Group's revenue and earnings won't be materially higher five years from now.
