Description

Recommendation

We are recommending a long position on MTCH driven by a number of structural tailwinds that should continue to support multi-year subscriber momentum, pricing power, near-term initiatives and optionality on declines for app store commissions.

While we like the fundamental drivers, we acknowledge that valuation is high; we see ~25% upside to our base case PT of $90 at current levels.

Thesis

1.      Significant underpenetrated global TAM with multi-year user and subscriber growth runway

·        The global online dating industry is a large, underpenetrated TAM with numerous tailwinds providing significant opportunity for growth:

o   Large single population delaying marriage

§  48% of US population (ages 15+) are single, with individuals marrying on often 3 years later vs 2000 (US Census Bureau)

o   Online dating continues to remain underpenetrated despite advances over the past 10 years

§  15% of all Americans, 27% of Americans aged 18-24 and 22% aged 25-34 have used online dating as of 2015 (vs 11%, 10% and 22%, respectively in 2005) (Pew Research)

o   We estimate that Tinder has a ~19% penetration of the US TAM[1], suggesting ample runway to gain mindshare as more Americans adopt online dating. This represents ~75% market share for those US singles that have used dated online

§  While Tinder retains dominant market share within the online dating industry, the penetration lags relative to other app-based peers[2]

·        While the domestic market still provides ample runway for growth, international, particularly APAC, remains a growth engine for the foreseeable future

o   APAC represents a TAM of 300m singles[3], 4x the North America TAM

o   Mobile internet penetration expected to ramp significantly over the next few years in APAC to catch up to global avg, from 45% in 2018 to 62% in 2025 (vs global average of 61% today)

o   MTCH driving investments and initiatives to drive growth in APAC

§  OkCupid success in India; Tinder Lite launch

§  Japan most successful APAC market, generating $200m of revs (10x 2014), or 11% of total revs

·        Region is expected to contribute 25% of revenues by 2023

·        Assuming 20% penetration (similar to current US Tinder penetration), 7.5% paying ratio (as % of MAUs, similar to Tinder today) and daily ARPPU of $0.60 (similar to Tinder today), APAC could represent a ~$875m+ revenue opportunity, or 43% of 2019E revenues. This would represent ~25% of our 2023E revenues, in-line with co. guidance

2.      MTCH benefits from significant network effects, providing a moat and significant scale versus competition

·        Given the 2-sided marketplace, there are significant network effects with winner take-all economics, placing MTCH at a prime position to accrue benefits

·        Tinder has 20% more MAUs than the prevailing 9 dating apps combined…and 5 of the top 10 dating apps are owned by MTCH[4]

3.      Fragmentation within the industry at long tail provides M&A opportunity with significant accretion

·        MTCH’s size and scale provide far superior operating leverage relative to peers

o   MTCH operates ~38% EBITDA margins vs Spark (5% of MTCH’s revenues) operating at ~10% EBITDA margins

·        Kunlun Group announced intention to sell Grindr in early 2019, with MTCH likely to be an interested bidder

o   Kunlun Group acquired Grindr for $250m in 2018

·        Coffee Meets Bagel may be another potential M&A target…no intention to sell, but last raised Series B in May 2018 at $82m valuation

·        Given MTCH’s size and scale, there appears to be significant opportunities to extract synergies, particularly around gross margin and G&A leverage; additionally, acquired assets can benefit from the size of MTCH’s R&D teams, which can help the product and lift engagement and monetization

4.      Upcoming initiatives and product roadmap should compound existing innovations and sustain M/HSD ARPPU growth over the subsequent years

·        Total MTCH and Tinder subs on average spend ~$16/mo and ~$210/yr, which compares favorably to amount spent on video games, and is a slight premium to how much an individual spends for a subscription Netflix, Spotify and NY Times

·        ~7% of Tinder MAUs are paying subscribers, which compares quite favorably to paying ratios for most other interactive media companies; we assume modest increases in the paying ratio over time as they continue to invest in product and innovate on monetization

·        A number of recent and upcoming product innovations and initiatives should provide tailwinds to paying ratio and ARPPU, including:

o   Q1 2018: Tinder Feed launched, resulting in 35% more offline connections

o   Q3 2018: Tinder U, increasing adoption by university students; Tinder Picks, driving Gold adoption

o   Q4 2018: Rivalry Week, helping Tinder U

o   Q1 2019: Spring Break, helping Tinder U; partnership with LYV, increasing traction around live events; iOS redesign, which has increased engagement (user likes up 20%, messages up 10%) and adoption of Tinder Gold/Plus, driving upside

o   Next 12 months: Snap integration; Android redesign implemented, which should have similar positive effects on adoption and engagement like iOS, driving upside to company guidance

·        Additionally, based on 3p data, we expect upside to Q2 subscribers and ARPPU; additionally, we expect recent product launches to drive sub mix towards Tinder Gold vs Tinder Plus, which should lead to better ARPPU trends in Q2 vs consensus

o   Engagement (DAU/MAU) and time spent metrics also appear healthy and trending in the right direction over the past few quarters, based on 3P data

5.      Strong brand recognition provides Tinder with moat and competitive advantage over peers, leading to efficiencies in operating margin and offsets the naturally high churn in the industry

·        Based on our estimate, we believe the average lifetime of a Tinder sub averages ~4 months

o   The high churn is offset by a strong brand name and a high win-back rate

o   Based on company commentary, Tinder operating margins higher than consolidated MTCH due to deleverage in S&M

·        Despite recent momentum in Hinge and Bumble, interest in Tinder continues to remain high with Google Trends suggesting increased recent interest

6.      While non-Tinder brands are ex-growth, little expectations based into those brands with assets in the portfolio (Hinge) that could provide upside

·        Opportunity for certain brands (Hinge in US/London, OkCupid in India, Pairs in Japan) to breakout and provide upside, which could help drive non-Tinder revenues back into positive territory

·        Re-deploying marketing dollars away from legacy brands (Match and Meetic) to higher growth brands (Hinge), which should help drive operating margins

7.      Despite growing at a double-digit CAGR, MTCH is comfortably able to sustain 40%+ EBITDA margins with opportunities to grow margins

·        In May 2019, the Supreme Court upheld a previous ruling that app buyers could sue Apple for overcharging prices, which could upend the App Store commission ecosystem

o   Any downward revisions in app store commissions, currently 30%, can provide significant accretion to EBITDA[5]

o   Additionally, speculation has emerged that MTCH has begun to circumvent the app store, similar to Spotify, by requiring users to directly input credit card information in-app

·        App store commissions aside, MTCH has opportunity to gain leverage off its other cost items, especially as they lap litigation expenses in 2019

o   Due to having significant market share, brand power and powerful network effects, we expect MTCH’s S&M as % of revenues to skew closer to SPOT and NYT over time

o   Despite marketing investments in Hinge and international investments, MTCH has stated operating margin expansion for 2019

8.      Upcoming distribution of MTCH shares from IAC will increase float, reduce short interest and make MTCH eligible for future index inclusion

Valuation

·        Our base case PT is $85 (15% upside), supported by our SOTP below (24x ‘20E EBITDA) and DCF valuation (below), and would represent a 32% 12-month IRR @ current levels

o   Our upside case PT is $120 (60% upside), supported by our SOTP below (26x ‘20E EBITDA) and would represent a 70% 12-month IRR @ current levels; our DCF valuation (below) would justify a $145 stock price

o   Our downside case PT is $60 (20% downside), supported by our SOTP below (22x ‘20E EBITDA) and DCF valuation (below), and would represent a -33% 12-month IRR @ current levels

DCF – Base Case

DCF – Upside Case

DCF – Downside Case

SOTP

·        Using our base case estimates, we get to a $90 PT using SOTP to value Tinder and Match (ex-Tinder) separately

o   For Tinder, we use a 30x ‘20E EBITDA multiple, using ETSY (28x ‘20E EBITDA) as a comp

o   For Match (ex-Tinder), we use a 12x ‘20E EBITDA multiple, using EBAY (9.5x ‘20E EBITDA) as a comp

·        Using our downside case estimates, we get to a $60 PT using SOTP to value Tinder and Match (ex-Tinder) separately

o   For Tinder, we use a 25x ‘20E EBITDA multiple; for Match (ex-Tinder), we use a 9x ‘20E EBITDA multiple

·        Using our upside case estimates, we get to a $120 PT using SOTP to value Tinder and Match (ex-Tinder) separately

o   For Tinder, we use a 35x ‘20E EBITDA multiple; for Match (ex-Tinder), we use a 14x ‘20E EBITDA multiple

·        While Tinder EBITDA isn’t reported, we assume that that Tinder has higher margins than the group based on prior management commentary

Catalysts

·        App store commission announcement

·        New product roll-outs (a la carte features) and partnerships

·        APAC rollout

·        Earnings

·        M&A (i.e. Grindr, Meet)

·        IAC spin-off / distribution of shares

Risks

1.  Competition with other dating apps

a.  While competition will always remain a significant factor to monitor, we remain comfortable with the risk for the following reasons:

                                                  i. Network effects and winner-take all dynamics within the industry, which MTCH possesses

                                                 ii. MTCH’s unrivaled size, scale and financial flexibility enables it to accretively acquire other assets

                                               iii. Most users use multiple apps, so to the extent viable competition arises and MTCH can’t consolidate, may not necessarily cannibalize MTCH’s portfolio of assets

2.  Facebook

a.  Facebook emergence in dating in Colombia on 9/2018 and more recently in Asia

                                                  i. We feel relatively comfortable with the risk given users are likely to want to use a separate dating app than Facebook, lack of traction for Facebook’s efforts to date, MTCH’s size and scale and the fact that users use multiple apps

b.  Facebook sign-ups

                                                  i. We feel comfortable with the risk given increasingly more Tinder registrations do not use Facebook sign-up; management in Q4 2018 said ~75% do not use Facebook sign-up

c.  Facebook Audience Network

                                                  i. While this created disruption in advertising revenues in Q1 2019 and is likely to serve as a headwind going forward, these represent a small portion of Tinder’s revenues

3.  Litigation with Tinder employees and/or Bumble

4.  Execution issues with product roll-outs / partnerships

5.  Privacy concerns may create reputational risk

Catalyst

·        App store commission announcement

·        New product roll-outs (a la carte features) and partnerships

·        APAC rollout

·        Earnings

·        M&A (i.e. Grindr, Meet)

·        IAC spin-off / distribution of shares