One of the most basic investing principles is to buy low, or at a level where a stock carries a significant upside. That's not always easy to do since investors tend to rush to quality stocks, which bids up their prices.
But with the downturn we experienced last year, there are exciting companies that are down massively and have the potential to recover and eventually reward shareholders, or at least those willing to be patient. One such business is the online dating specialist Match Group (MTCH 0.39%). Let's find out why.
What's wrong with Match Group?
Match Group owns a portfolio of dating websites and apps, most notably Tinder, the famous platform that popularized the swipe left/right approach to online dating. It accounted for 67% of Match Group's total 16.1 million paying users as of the end of 2022 and remains the most downloaded dating app in the world.
Still, Tinder and the rest of Match Group's business have slowed considerably lately. The company's paying users declined by 1% year over year in the fourth quarter, while its total revenue of $786 million was down 2% compared to the year-ago period. That is partly a result of the comparisons to a pandemic-related boom.
And the company's new CEO, Bernard Kim, says that Match Group has, in the past, failed to take full advantage of Tinder's opportunities. Let's see how the company can bounce back over the long run.
The remaining opportunity in online dating
One of the good things about Match Group's business is that the value of its platform increases as more people use it -- a solid competitive advantage known as the network effect. Tinder alone already has nearly 11 million users, and the more people in its ecosystem, the more future daters will be attracted since it provides a large pool of potential partners.
That isn't the only selling point with online dating. Other platforms found success focusing on specific characteristics -- for instance, some target seniors or members of a particular ethnic or religious group.
Still, many singles want as vast a pool as possible, and no platform offers that more than Tinder. That applies to Match Group's entire portfolio. More than 50% of relationships that were started via online meetings began on one of the company's websites or apps.
This network effect puts it in a position to attract more users and keep growing, provided there is still plenty of untapped potential in this industry. And thankfully for Match Group, that seems to be the case.
Even in the U.S., only about 22% of adults are currently using online dating, according to Statista. And since the U.S. is the worldwide leader in this field, there should be a massive opportunity elsewhere.
Match Group is seeking to make headway in the Asian market, the largest by population, where its use remains very low. This could provide the company with growth for many years to come, especially since there is a generation gap when it comes to online dating, with people between the ages of 18 and 44 more likely to engage than older ones.
As younger generations age, the percentage of people who use online dating should increase. That is great news for Match Group, especially since it will aim to improve its platforms, especially Tinder, to boost revenue growth (including revenue per user) and the number of paying subscribers.
Match Group has been experimenting with various pricing options on Tinder, among other measures to cater to its existing and potential users. It should roll out new options this year, which will help boost engagement.
Match Group is still a buy
Although Match Group encountered headwinds lately, there is plenty to love about the company. Most notably the competitive edge in its network effect (not to mention its name recognition in online dating) coupled with the still-untapped audience should allow it to rebound from its recent struggles, especially for patient investors willing to hold on to its shares for five years or more.
That's why investors should consider initiating a position in the stock, especially while it remains down.
