Introduction:
MTCH is a US-based company that controls the most popular dating apps such as Tinder, Hinge OkCupid, etc. The main business model in MTCH revolves around the concept of optionality, where users pay for options. MTCH offers boosts, premium likes, and passport to allow the users to have as many options as possible. However, dating apps are different from a traditional subscription model in terms of how customers churn. A traditional subscription model like Netflix experiences lower churn over time as their service improves, there is even a strong loyalty built into long-term subscribers as they are confident in the quality of services that Netflix provides. However, for MTCH their churn rate decreases as their service improves because as users get more high-quality matches they are more likely to get into a relationship and delete dating apps. This has caused many investors to closely look at metrics such as Monthly Active Users (MAUs), Annual Paying Users (APUs), and Churn rate.
Investment Thesis:
Shifting Consumer’s Habit
Online dating is the most popular way for consumers to meet their partners nowadays (SOURCE). I believe that this shift in consumer habit is not coincidental but the result of a shift in societal norms. Nowadays, It is against societal norms to approach a stranger in public due to it being perceived negatively or with ill intent and the fear of rejection that stops strangers from approaching each other in public. This has led to an increasing reliance on dating apps as a means for consumers to find their significant other, I believe that this trend of shifting societal norms will accelerate even further in the near future due to how ingrained this mindset is in current society.
Large Barriers to Entry
Dating apps are very centered around the number of users that utilize their platforms and the % of those users that are female. The reason is that with a larger cohort, consumers will perceive the app to have a higher chance of matching them with someone more compatible, the network effect. Most dating apps are male-dominated (SOURCE), which means that the pool of available females looking for a heterosexual relationship is significantly smaller and so as the numbers of females on an app increase the more attractive the app becomes. MTCH has all the right ingredients for a high-quality dating app. A large portfolio of dating apps that cater to specific demographics, a large number of users using their apps, and an almost proportionate ratio of male-female (SOURCE).
Exuberant Growth of Affordable Internet
Access to the Internet is an issue that plagues the rest of the world, as of 2021 2.9 billion people are not connected to the Internet (SOURCE). However, 3 issues are highlighted to stand in the way of the Internet achieving full adoption (SOURCE). Availability, Affordability, and Adoption. Availability refers to the availability of Internet infrastructure, affordability refers to how affordable Internet access is to consumers and adoption refers to the consumer’s willingness to learn and utilize the Internet. In terms of availability, governments globally are beginning to recognize internet connection as a basic right and have spent lavishly (SOURCE) to provide their citizens with access to high-speed broadband (SOURCE). In terms of affordability, I believe that as more governments begin to spend on building out infrastructure, it reduces the cost of broadband. On top of that, there are also significant economies of scale to be realized by these network companies that reduce the cost to provide network services and in turn reduce the cost to consumers. In terms of adoption, “the demographic profile is skewed towards youth…It means that the workforce will become more connected and technology savvy”. The habit of using the Internet is already ingrained into the next generation of youths, which eases their adoption of online services such as MTCH’s portfolio of dating apps.
Market:
An interesting market to highlight that MTCH could potentially benefit a lot from is China, assuming that regulatory restrictions on MTCH are lifted. As of 2024, China has a total population of 1.4 billion (SOURCE)
Dating Culture
China still conforms to traditional gender roles of females being homemakers. As more women receive higher education (SOURCE) and seek out higher-paying jobs, the opportunity cost for marriage subsequently increases which reduces the appeal of marriage, from this phenomenon it introduced the term “leftover women”. Leftover women refer to women above 30 who are not yet married, this represents a potential demographic of customers that MTCH could integrate into its portfolio and boost MTCH’s attractiveness as now there would be a larger female demographic on their apps.
Gender Ratio
China currently has about 28 million more females than males (SOURCE), a sharp disproportion in the gender ratio. This could increase the appeal of dating app features such as Passport, allowing male users to match with other female users from different countries.
Easy Filtering
Chinese consumers are also more selective in terms of their partners, looking out for traits such as (Height, Level of Income & Education, and Hukou). MTCH’s dating apps require users to declare some of these traits which eases the search process for users. On top of that, the 996 working culture in China reduces the free time Chinese consumers have to meet organically in real life increasing the attractiveness of dating apps, as dating apps could be a way for young couples to meet given that the effort and time necessary to use dating apps is very low.
Revenue:
MTCH recently announced their Q1 results which spooked investors as their APUs declined which could send a signal that MTCH is unable to maintain their payers going forward. However, MTCH's management believes that the fall in payer count on Tinder is due to 1) Price Raises, 2) a Fall in MAU, and 3) a Fall in Discretionary consumer spending especially amongst younger consumers. How they plan to remedy this is through increasing MAUs and improving payer conversion rate or at least maintaining PCR but with a larger pool of MAUs. With management teasing new features that utilize AI e.g. for new users creating a new profile, they have thousands of photos on their phones. MTCH wants to use AI to help sieve through these photos and pick out a few that best show all sides of their personality.
Tinder
Data for Tinder was from (SOURCE) and (SOURCE), data is confirmed by (SOURCE).
When forecasting Tinder’s MAU, I believe that Tinder has already picked all the low-hanging fruits, subsequent MAU growth comes from converting those unwilling/uncomfortable with trying dating apps. Another frontier for MAU growth will also be economic wealth, as regions of the world increase in the level of wealth more people will be able to afford mobile phones and may have less time for traditional physical dating. Therefore, with increased marketing efforts and the growing acceptance of dating apps, Tinder's MAU is expected to rise. I believe that in my base case, with current macroeconomic conditions slightly improving it would take another 8 years in my forecast before MTCH experiences any significant level of growth.
When forecasting Conversion rate, I believe that in the earlier years of my forecast, as MTCH has to convince its users that it is worthwhile to pay for their services, my conversion rate remains low. However, over time as users grow frustrated or grow to trust MTCH’s products the conversion rate picks up. This pattern continues also when Tinder faces a large growth in MAU, it has to prove to its newly acquired MAU they are worth paying for. During periods where MTCH experiences large growth in MAU, the conversion rate faces a small dip to reflect a smaller/similar pool of paying users relative to a larger pool of MAU.
When forecasting Annual Revenue/APU, I assumed that in the first 5 years of my forecast, as MTCH is planning on spending more on marketing to attract more MAU, the growth rate of Annual Revenue/APU grows at a slower rate as a higher price leads to lower MAU growth. I assumed that MTCH would have a large spike in Annual Revenue/APU as management sees this large spike as a deliberate and necessary step taken to weed out the free riders on the app. “The No. 1 complaint female users have on Tinder is that they are overwhelmed with likes and can't make a choice.” However, beyond that deliberate spike, I assumed that Annual Revenue/APU grew in line with the perpetual inflation rate.
Hinge
Data for Hinge was from (SOURCE), and data is confirmed by (SOURCE).
When forecasting MAUs, I don’t believe that Hinge and Tinder are mutually exclusive where MAUs from Hinge would cannibalize Cash Flows to Tinder and vice versa. The reason for this is that most users report using more than 1 dating app (SOURCE), this is especially true for men who usually get fewer matches so they cast a wider net by using multiple dating apps. I believe that Hinge still has a long runway for growth as it is still a new service, so I assumed that Hinge would sustain its historic high growth for 5 years before tapering off.
When forecasting the Conversion rate, Hinge is a relatively new addition to MTCH’s portfolio of apps. Opting for less granularity I forecasted it as a % of historic averages.
When forecasting Annual Revenue/APU, opting for less granularity I forecasted it to grow in line with the perpetual inflation rate.
Others
Others include Evergreen & Emerging and MG Asia. Given that other dating apps in MTCH’s portfolio are more focused on a specific demographic, I believe that these dating apps will have limited success compared to Hinge and Tinder as their Total Addressable Market is significantly smaller. So, to avoid making an overly granular assumption I forecasted Others as a % of Hinge+Tinder revenue, I assumed that it tapers downwards as well given that Hinge and Tinder’s revenue will grow to a larger sum at a faster pace than E&E.
Indirect
Indirect revenue refers to the revenue MTCH earns from advertisers on their apps. Given that the success of indirect revenue is hinged on the success of their portfolio of dating apps, I forecasted Indirect as a % of Hinge+Tinder revenue.
Cost:
COGS
When forecasting COGS, taking into account data from (SOURCE). While there are lawsuits surrounding the anti-competitive practices and monopolistic behaviors of the App Store and Play Store, however the outcome of these lawsuits is still uncertain. So, opting for less granularity, I forecasted COGS to remain in line with historical averages throughout my forecast.
Marketing
MTCH uses marketing to build brand quality not to build awareness in consumers “Tinder’s marketing spend is more about brand marketing and not direct response. So it isn’t about spending more just to simply hit a quarterly payer number.” – 2023 Q4 Earnings Conference.
When forecasting Marketing, I assumed that MTCH would keep their marketing spend at an elevated level for 8 years in line with management’s goal of building up brand goodwill, and also marketing spend has a delay period before any returns from the investment are seen, so this 8 years is in line with my revenue expectations of needing 8 years before MTCH would increase their MAU substantially. Over time, I assumed that marketing spending tapers downwards as MTCH builds up substantial goodwill and traction through word of mouth such that marketing spending has a lower ROI.
SG&A
When forecasting the total number of employees, I assumed that employee growth grew in line with historical averages before tapering downwards as MTCH can utilize AI to provide their services in the process needing fewer employees.
When forecasting Cost/Employee, opting for less granularity I forecasted it to grow in line with the perpetual inflation rate.
Product Development Expense and D&A
When forecasting Product Development Expense and D&A, opting for less granularity I forecasted it as a % of historical averages.
WACC:
10Y T-Bond Yield (1M Avg) = 4.59%
Beta (SOURCE) = 1.51
Stable Market ERP (SOURCE) = 4.60%
COE = 11.54%
MTCH group is rated “BB” (SOURCE)
BB Bond Yield (1M Avg) = 6.50%
Marginal Tax Rate = 21.00%
AT COD = 5.14%
Stock Price (5D Avg) = $30.25
Shares O/S = 268.01M
Market Value of Equity = 8107.30M
Weighted Average Maturity of Debt = 5 Years
FY23 Interest Expense = 159.89M
Market Value of Debt = 3705.57M
%Debt = 31.37%
%Equity = 68.63%
%WACC = 9.53%
Conclusion:
Ultimately, in my base case, I value MTCH at $38.35 per share. I believe that the markets have overcorrected for MTCH's fall in APUs in Q1, MTCH still offers a critical service that is going to be the new norm going forward. This is especially true, given how MTCH proved how invaluable their services are to users during the Covid-19 lockdown. I believe that the markets did not price in how there is a shift in societal norms towards issues such as cold approaching in real life and the acceptance of working from home. All these new norms are going to shift how consumers meet each other and MTCH will be the one that provides a reliable platform for consumers to meet each other.
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