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Match Group: From Dominant Leader to Turnaround Play

Published 21/12/2022, 17:07
  • Match stock has plunged 70% so far this year
  • Quickly decelerating growth has culminated in a soft outlook for the fourth quarter
  • New management and new efforts need to work for the stock to reverse
  • The decline in Match Group (NASDAQ:MTCH) stock seems almost illogical. In a bear market, it’s not surprising that, say, an electric vehicle stock has lost three-quarters of its value. Investors were overly optimistic — euphoric, even — about EV sales in 2021, only to take a more cautious tone here in 2022.

    Nor is it necessarily a surprise that a pandemic winner like Zoom Video Communications (NASDAQ:ZM) would plunge. Its growth has substantially slowed as normalcy has returned, and expectations for the future have come down.

    But Match should be different. This wasn’t, and isn’t some speculative, high-flying growth stock; it’s the unquestioned leader in online dating and now a component of the S&P 500. And even in a post-pandemic environment, there’s little reason to believe that the steady, long-term rise of online dating is going to end.

    And yet, MTCH closed Tuesday at its lowest level in almost four years.

    In context, however, the stunning 70% year-to-date decline in MTCH makes sense for one key reason: the company’s growth has stalled out. That, in turn, has completely changed the stock’s reputation among investors. That reputation needs to change again for the stock to get out of its tailspin.

    Match Group in 2021

    For most of 2021, MTCH traded in the range of 70x the expected adjusted earnings per share for the year. That multiple proved to be a problem: like so many valuations last year, it was simply unsustainable.

    But the case for MTCH receiving a premium valuation of some kind did make some sense. The stock seemed to offer almost everything an investor could want.

    The company was still growing its top line at a rapid clip. Revenue increased by 25% in 2021, on top of 17% growth the year before. Profit margins were enormous: adjusted operating income (what most companies call Adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization) was nearly 36% of revenue.

    And both metrics had room for improvement. The online dating market seemed set for growth. The nature of the business model, meanwhile, suggested that higher revenue would create even higher margins, as the cost of serving an incremental payer on a Match Group product is relatively small.

    Even the risk of the company suffering from a macroeconomic downturn seemed small. Consumers surely would cut back spending elsewhere before reducing it on companionship, one of the most basic human needs.

    Again, in retrospect, 70x earnings seems like a ridiculously high multiple. It needed to compress and did so during the bear market seen here in 2022. Yet, at least based on what investors knew at the time, the optimism toward MTCH broadly made some sense.

    An Ugly 2022

    But Match simply hasn’t lived up to expectations. Growth has steadily slowed as the year has gone on, and fourth-quarter guidance looks particularly concerning. Match expects both revenue and adjusted operating income to decline year-over-year.

    The strong dollar certainly is having an impact. On a constant-currency basis, Match expects revenue to increase roughly 6%, with a nine-point headwind from the dollar. But single-digit growth is hardly what investors have come to expect.

    Clearly, the macroeconomic environment has a much greater impact than investors believe. But Match also seems to be lagging. Smaller rival Bumble (NASDAQ:BMBL), too, has seen growth slow, but it’s still posting solid increases in revenue. Excluding currency and the impact of the Russia-Ukraine conflict, Bumble expects revenue growth of 22% to 25% in the fourth quarter.

    Looking to 2023

    And so MTCH has gone from a stock seemingly deserving a premium valuation to one seemingly needing a turnaround.

    The good news is that management has been overhauled. Chief Executive officer Shar Dubey resigned in May. Renate Nyborg, the head of Tinder departed three months later.

    New Match CEO Bernard Kim seems intent on improving the company. Match’s Q3 shareholder letter highlights a number of efforts to return Tinder to growth, while international expansion can continue the solid performance at Hinge.

    Certainly, this can work. For now, Wall Street remains behind the company, with the average price target implying a nearly 60% upside. But 2022 results suggest Match needs some help from the macroeconomic environment — or products that are compelling enough to make consumers spend anyway. Right now, it has neither.

    Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.

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