Match Group (MTCH 0.63%), the online dating conglomerate best known for its flagship app Tinder, has had a tough go of it over the last couple of years. Between expensive lawsuit settlements, management turnover, and big foreign exchange headwinds, Match Group has seen its stock decline by more than 70% since its highs in 2021.
However, with most of those issues now in the rearview mirror, Match Group is reporting steady progress across most of its brands and generating the kind of growth that should have investors excited once again.
The headline numbers
Match Group reported quarterly sales of $830 million in the second quarter, which was 4% higher than the same period a year ago and an acceleration from the first-quarter growth rate. Driven predominantly by price increases and the rollout of new weekly plans at Tinder, Match Group saw an overall increase of 10% in its average revenue per paying user. For Tinder, which accounts for 57% of Match Group's overall revenue, this was the first time it saw an increase in revenue since the third quarter of 2022.
But it isn't just the top line where Match Group is seeing an improvement. Match Group has generated $292 million in free cash flow so far this year, compared to -$7 million last year. This increase is largely attributable to the lapping of a $441 million litigation settlement that Match Group paid out last year. With the costs back in line, Match Group is now guiding for $320 million to $325 million in adjusted operating income next quarter and an overall improvement in its adjusted operating profit margins for the full year.
Watch out for Hinge
While Tinder attracts most investors' attention due to its impact on the company's overall sales line, Hinge -- Match Group's second-largest dating app -- has been a shining asset in the company's portfolio.
Hinge, which tends to target older, more serious daters, has been growing like a weed. In fact, Match Group's management team estimates that Hinge will generate at least $400 million in revenue this year, which is quite an improvement from the $31 million it was generating just four years ago. Yet even with this tenfold increase in revenue, there still looks like plenty of room to run for the burgeoning dating app.
Despite only launching in most of its European markets within the last 12 months, Hinge is already one of the top three most downloaded dating apps in 14 markets around the globe. This quarter, Hinge reported nearly 50% growth in downloads and 35% growth in revenue relative to the second quarter of last year.
As more and more users continue to join the platform, the cost to acquire new users should come down for Match Group, as daters will want to be where everyone else is. This sort of network effect is the same thing that propelled Tinder to its current 50%-plus operating margins.
Is Match Group a buy?
While Match Group's earnings certainly looked strong, a single quarter's results shouldn't dictate whether a stock is a buy or not. Instead, it's important to look at the whole picture and see where the company is heading relative to its valuation.
For Match Group, the company has generated $3.2 billion in revenue over the last 12 months across its entire portfolio of apps, which is a roughly 15% annual increase from its 2018 figure. Management expects to generate greater than 36% adjusted operating income margins this year, which, applied to the current revenue base, would mean roughly $1.2 billion in adjusted operating income annually. While adjusted operating income isn't a perfect replacement for true earnings, it strips out much of the one-time costs like severance charges and litigation payments that management doesn't expect to continue.
At Match Group's current enterprise value (market cap plus net debt) of $15.4 billion, Match Group is valued at roughly 13x its adjusted operating income. That strikes me as an attractive price to pay for a business with a clear track record of growth and a large global opportunity still in front of it.
