2022 was a rough year for Match Group (MTCH 0.63%), and 2023 is shaping up to be another disappointment. After falling more than 60% last year, Match Group stock hit a new all-time low last week after reporting its third-quarter earnings. The dating giant and owner of online properties such as Tinder, Hinge, and Match.com saw its revenue and profits grow, but investors were worried about declines in paying subscribers. As of this writing, shares of Match Group are off 83% from highs set in 2021.
Match Group has collapsed in value. Should investors buy the dip, or is it time to give up hope for this online dating leader?
Growing revenue, declining users
If you just read the headline numbers, Match Group's third-quarter results looked solid. Revenue was up 9% year over year to $882 million, with operating profit up an even stronger 16% to $244 million. That's an impressive operating margin of 28%.
Dating apps such as Tinder and Hinge have fantastic unit economics given their extremely low incremental costs when charging for premium features. The only sizable fee is to the app stores run by Apple and Google parent Alphabet. As Match Group grows its revenue, it should continue to see operating margins expand, which will lead to earnings growing even faster than revenue.
The financials looked great, so what was the problem? Investors are concerned because Match Group's paying users declined 5% year over year to 15.7 million, mainly due to losing subscribers at its largest app, Tinder. Tinder raised the price of its subscription offerings in the U.S. by as much as 50% over the past year to keep on par with other dating apps. Clearly, the aggressive price hikes have taken their toll on subscriber numbers.
While it now looks like Tinder was mismanaged before new CEO Bernard Kim took the reins in 2022, declining payers isn't necessarily a bad thing. Only a small percentage of dating app users pay for upgraded features, so the absolute number of payers has little bearing on the number of people actively using Tinder. In fact, in some cases, a smaller number of paying users could actually help improve the health of the dating marketplace. The No. 1 complaint female users have on Tinder is that they are overwhelmed with likes and can't make a choice. Fewer premium users who get unlimited likes could reduce these issues.
Investors definitely need to track the number of payers at Match Group's portfolio of brands, but it isn't the end of the world if they decline for a few quarters after some aggressive price hikes. Revenue and profits are still climbing higher, which is what investors should focus on. As long as people are using Tinder, the company should be able to charge some of them for premium services. If that ends up being just a small percentage of the users paying a lot of money, so be it.
A bright future for Hinge, potential improvements at Tinder
The brightest spot in the Match Group portfolio is Hinge, the relationship-focused dating app and the second-largest brand for the company. Revenue at Hinge grew 44% year over year to $107 million in Q3, and it's on pace for $400 million in sales this year. After rolling out in many European countries and with plans to hit more markets in the near future, Hinge's users have exploded higher in the last few quarters, which in turn have helped fuel revenue growth. Eventually, Match Group believes this can be a $1 billion business.
Tinder is by far the largest segment for Match Group doing over $500 million in revenue last quarter. Price hikes have supported revenue growth, but Kim and his new team believe there's a lot of low-hanging fruit for Tinder to improve its service. These opportunities include improving the female experience, adding more conversational tools to profiles, and using a new marketing campaign.
Previously, Tinder didn't have much of a marketing strategy and just grew off the virality of the service. Now, it's a more mature business, and management wants to drive the brand narrative for consumers and convince its core, younger demographic to engage with the app.
There are other brands that Match Group owns, but the two drivers of growth will be Tinder and Hinge. As Hinge rides the wave of international expansion and Tinder accelerates growth over the next few years with these operational improvements, Match Group could continue to grow its revenue around 10% each year.
Data by YCharts.
Is the stock a buy?
With the stock now below $30, Match Group trades at a forward price-to-earnings ratio (P/E) of just 10.6. This is well below the market average and is typical of a business with zero growth prospects. Match Group is growing its revenue at a healthy clip and is riding the secular tailwind of online dating around the world. If the company continues to put up steady revenue growth with growing profit margins, this valuation will likely recover to a much higher level in the future.
Management wants to take advantage of this low stock price too. It has started to repurchase shares, buying back $300 million of stock just last quarter (and $445 million year to date). At a market cap of about $8 billion as of this writing, Match Group could reduce its share count substantially.
Add all this up, and Match Group is a great buy at these prices, despite all the negative sentiment out there.
