Most people -- if not everyone, at this point -- have heard of online dating. Hundreds of millions of folks around the world use smartphone apps like Tinder, Bumble, and Hinge to connect with potential romantic partners. It is a global phenomenon, with these apps routinely being some of the most popular every year on mobile app stores. In fact, for heterosexual relationships, it's estimated that roughly 40% now begin online, with that number steadily rising.
In spite of this massive growth, the leading online dating company, Match Group (MTCH 0.63%), has seen its stock flounder in recent years. The owner of Tinder and fast-growing Hinge has seen its share value collapse by 80% from all-time highs as it loses paying users. Does this stock-price movement indicate that the online dating giant is in trouble? Or is this just a fantastic buy-the-dip opportunity? Let's look closer and find out.
Positive headline numbers paired with growth at Hinge
Match Group posted its fourth-quarter and full-year 2023 results this week. If we look at its headline financials, the report was solid. Revenue grew 10% year over year to $866 million in Q4, while its operating margin came in at 30%. These scaled dating applications are highly cash-generative, with Match Group producing $829 million in free cash flow last year.
Guidance was solid, too. In Q1 of 2024, Match Group expects revenue to grow between 8% to 9% year over year, with profit margins similar to 2023. For the full year, sales are expected to increase between 6% to 9%, which would equate to over $3.5 billion in revenue. Project forward to its current operating margin, and this comes out to over $1 billion in earnings (and likely cash flow) in 2024.
On top of this strong guidance, its second-largest application, Hinge, is growing like gangbusters. Hinge direct revenue was up 50% year over year to $116 million in Q4 of 2023. In the next few years, as the app expands throughout Europe and other new markets around the globe, Match Group expects the division to hit $1 billion in annual sales. Not bad for a segment barely generating any revenue a few years back.
MTCH Operating Income (TTM) data by YCharts
One glaring (and potentially huge) issue
If you just read these headline numbers, you might have expected Match Group's stock to rally in response. Even Tinder -- Match Group's largest segment -- grew direct revenue 11% year over year to $493 million in the fourth quarter.
However, there was one nugget of information about Tinder that has kept Match Group shares down, and will continue to keep them down unless it reverses: new user growth. According to management, global daily new users (including sign-ups and reactivations) declined by a mid-single-digit rate year over year in Q4.
Investors are also concerned about a drop in paying users at Tinder, which fell 8% year over year to just under 10 million. However, I think this number is less of a concern compared to the overall user count, as Tinder aggressively hiked prices in the United States in 2023. Revenue per payer was up 21% year over year in Q4, for reference.
Now, over the long term, the number of people downloading and using Tinder is the lifeblood of this business. If there are fewer users, it is less valuable for someone to sign up for Tinder's premium subscriptions. Executives are aware of this issue and plan to address it over the next few years. They will do so through increasing marketing awareness for Tinder, focusing on improving the experience for women, and innovating with new products.
Time will tell if these changes will stem the Tinder user decline. But don't underestimate this problem. It is a big concern for Match Group that needs to be fixed in the coming years, or else it risks seeing Tinder become less and less relevant in the online dating world.
Match Group stock remains cheap, but should you buy shares?
With the stock down so much, Match Group shares look cheap. It currently has a market cap of just $10.4 billion and expects to generate around $1 billion in free cash flow and operating earnings this year. That gives the stock a forward price-to-earnings ratio (P/E) of about 10. Management is also plowing cash into share repurchases, which can help create shareholder value over the long haul.
The question investors should ask themselves is: Do you believe this is a fixable, short-term issue for Tinder, or is the app headed for irrelevance? If you think the Tinder business is doing just fine, it may be time to load up on some Match Group stock.
