Investing in Online Dating: Love Comes at a Price

Even if online dating isn't your thing, you can't leave your TV on for more than five minutes without seeing a Match.com ad. Yet there has been little discussion about online dating as a stock investment opportunity. Meanwhile, various companies such as IAC/InterActiveCorp (IAC), Spark Networks (LOV), and Jiayuan International (DATE.DL) are aching to steal your heart.

The biz behind the big names
As the owner of Match.com, Chemistry.com, and OKCupid, IAC is in the business of discovering the next big website. And if it can't think it up, it acquires it. The company is broken up into four segments: Search (which includes Ask.com), Match, ServiceMagic (an online marketplace), and Media/Other. Its Match segment made $518 million in 2011, or approximately 25% of IAC's annual revenue.

By keeping an eye out for successful companies and striking while the iron is hot, IAC has taken great strides in its quest to dominate the online dating market. In 2011 it snagged an 81% ownership of the French equivalent, Meetic, and took a 20% ownership in Chinese dating service Zhenai. IAC also exclusively provides Yahoo! with approximately 2.7 million personals. This makes Match a solid segment in IAC's four-legged table of a business structure.

The dashing competition
We may have been knocked off our feet by IAC, but no romance is complete without a little conflict. Enter IAC's tantalizing competition: Jiayuan, the largest dating website in China, and Spark, which owns JDate, Matchnet, and many others. Spark's strong body of websites makes it a fitting opponent to step into the ring, and even though Jiayuan is very young (founded in 2003 and IPO'd in 2011), its rate of growth has soared.

Sources: IAC and Spark 2011 10-Ks; Jiayuan 2011 20-F.

IAC's 10-K provides limited information regarding its Match segment. However, measuring its financials to similar companies can still give us some perspective. While the Match segment acts as only a piece of the IAC pie, its standalone financials eclipse Spark's in practically every category, even when its cash flow suffers because of acquisitions.

As for Jiayuan, to the un-Foolish eye, its statistics may not seem like much for Match to worry about, but IAC should by no means rest on its laurels. Jiayuan's income has more than doubled year after year since 2009. If this still sounds like nothing, keep in mind that IAC has had 20 years of being public to get where it is now, and Jiayuan is hot on its heels after only one.

It also bears mentioning that 142 million people are currently registered on China's top three dating websites, compared with 40 million people in the USA. Even more impressive is that, according to its annual report, Jiayuan comes up 24 more times in Baidu search results than the common term for "dating." Let's see if the rest of Jiayuan's financials are as swoon-worthy as these statistics.

Source: Jiayuan 2011 20-F.

In 2009-2011, its net income jumped from $832,000 to $5.19 million, and its margins have remained positive as well. The gross profit increased from 55% to 68%, while operating ranged from 12% to 16% and net profit margin has stayed around 8% to 11%. 

IAC's 10-K provides only the operating margin for its Match segment, which rang in at 26%. The Match segment may be ahead by 12 points, but achieving this kind of margin is not out of the realm of possibility for Jiayuan. IAC may not have reason for fear in the short term, but it should definitely keep its eyes open to this strong company.

Jiayuan and IAC are both exciting companies that could hold a solid spot in your portfolio. IAC may look like the safer of the two at the moment, with a successful track record of owning websites and profiting from them. Still, keep an eye out for Jiayuan, as its rapidly increasing financials could lead to a huge payoff down the road. The future is promising for both businesses, and thankfully, unlike in the dating world, there is no need to pick just one.