- Analysts are overwhelmingly bullish on Match with the recent pullback from Facebook's upcoming dating feature. Analysts see a large market with room for multiple players to succeed, and numerous other reasons for optimism.
- Several risks exist, including the risk that Facebook's curated approach succeeds and dents Match's growth trajectory. There is also headline risk once Facebook announces more detailed plans in the dating space.
Is The Recent Dip a Buying Opportunity or the Start of a Longer Decline?
On May 1st, at its F8 developer conference, Facebook announced that it would be entering the online dating market. Prior to this date, Match had been on a tear, having increased 151% since early August driven by consistent user growth and increasing monetization. With the stock now 21% from its peak, does this present a buying opportunity, or the start of a bigger decline amidst heavy competition?
Facebook May See Some Success, but Not Likely to Slow Match Growth
Analysts are overwhelmingly bullish on the opportunity that the stock decline has presented investors. There are numerous reasons for the bullishness:
Room for multiple apps. Studies by Match show that dating app users use 3 apps on average while looking for a partner. With many apps offering different audiences and different matching mechanisms, users are looking to increase the odds of a successful match using multiple methods. In this environment, bulls argue that there is room for multiple dating apps to succeed, and that Facebook will simply become one of several apps that a user might use.
Facebook's demographics do not align with online dating. Facebook's core audience is trending older, which doesn't align well with the younger crowd on Tinder and other dating apps. Additionally, Facebook's one-size-fits-all approach has not historically done well in the online dating world. Apps that have shown success have carved out niche audiences, like Jdate or The League. Even the broadest apps like Tinder are still perceived by many people to be for specific audiences (i.e. for casual dating and for 18-34 year olds). Facebook's strategy of appealing to a large swath of people may prevent the app from gaining heavy usage among users. As Match states, "a 23-year old who just graduated from college is going to use a very different brand than a 43-year-old single mom who wants a serious relationship."
Users want to keep social media and dating separate. Match research suggests that the majority of users "don't want to be contacted by strangers on a social network meant for connections with friends and family." This was especially true among women and younger people. This was further supported by Match internal data. Previously, the company only offered user sign ups through Facebook. Last year, the company rolled out an alternative to Facebook sign up, and the feature was quickly adopted by 75% of total users. Furthermore, the company saw a lift in new user registrations.
The heavily-curated approach has not been popular in online dating. Facebook shared initial details suggesting that their approach to dating would involve a more heavily curated approach for serious dating. This runs counter to the swipe-heavy approach that has seen widespread adoption in online dating apps and has seen the most use by users.
Facebook has historically struggled to disrupt other industries. There are numerous industries that Facebook has tried to enter, but has struggled to meaningfully change. Facebook introduced payments, food delivery, and even status notifications. All of these features were thought to be potential killers for the leader in the space (Paypal, Grubhub, Twitter) but were later proven to be misguided. Facebook has even introduced several features that encouraged dating - Match noted that Poke, Facebook Graph Search, and Discover People all were rolled out over the years, but did not see enough traction to remain on the Facebook platform.
Facebook's entry could actually further destigmatize online dating. Online dating has come a long way in becoming a more accepted form of meeting new people. However, it still has a stigma in some social circles. The entrance of a large company into the space could further destigmatize online dating, thereby growing the market for online dating and benefiting many of the online dating apps.
Match, and Especially Tinder, Still Have Numerous Growth Drivers
As mentioned previously, Match (and specifically Tinder) was on a roll prior to the announced Facebook entry into online dating, and analysts still believe that momentum will continue after the Facebook dating launch. The reasons for the optimism are:
Monetization is still in early innings. Match has roughly 7 million paid members across their platforms, which is an estimated 10% of total members. The company launched Tinder Plus in 2015, and Tinder Gold in 2017, both of which saw immediate traction and a significant increase in both revenue per user and in new users. In fact, Gold has been a large reason for the stock's recent (prior to the FB announcement) outperformance as it has driven significantly higher-than-expected ARPU and subscriber growth, and continues to drive growth moving forward.
Looking ahead, the company still has numerous opportunities for monetization. Management has stated that they expect to launch a new feature in 2H18 that could drive further ARPU and subscriber growth. Match is currently testing Tinder Places, a location-based feature that has seen significant engagement among daily users in tests. Match also just began testing female-friendly options where women message their matches first. The feature in 2H18 could be one of the two, or it could be something else entirely.
Additionally, Match noted in 1Q18 that a la carte features became a bigger driver of growth than subscription revenue. This could be the start of a long trend, as more users are just now removing mental barriers to spending money on dating features. One a la carte option is Tinder Boost. Boost increases the number of times your profile is served to others, thereby increasing your likelihood of more matches. It's essentially an option for one to spend money and find more people that might be interested in them, and I think this should see even higher adoption as people begin to use the feature for the first time.
Even more broadly, beyond 2H18, Match is sitting on a group of users that have 1) heavy engagement with their apps, and 2) a strong desire to find the right person for them. Given the early stage of Match's efforts, this should bode well for monetization longer-term.
Longer-term trends are positive. Management states that the total addressable market globally is roughly 600 million people. Additionally, according to IAC, 1 in 5 relationships begin online. This should continue to trend higher as online dating becomes more widely accepted and user behavior shifts. Match is well positioned for a future in which more people are looking for relationships online. The company's portfolio gives them a wide presence across multiple slices of the dating market, including across the serious/casual spectrum (from Tinder to Match), as well as across age groups (from Tinder to OurTime) and geographies (Pairs, Meetic). And international should continue to fuel growth moving forward, as the company has significant room for growth in countries like India, Russia, and Brazil, where the company has high unaided brand awareness already.
Expectations and guidance look conservative. In the near-term, investors and analysts see conservatism in guidance for the next quarter and for the back half of the year. Management expects revenue growth of 32% y/y growth for 2Q, which represents a deceleration from 1Q18 despite the acceleration in recent trends. Additionally, full-year revenue guidance of 20-28% implies a significant deceleration in 2H18 down to ~21% growth at the high end (with more difficult comparisons cited as the reason by management). Many analysts believe this slowdown implied by guidance is overly conservative as well.
Longer-term, expectations are for a fairly significant deceleration as well in paid member count. Consensus data from Visible Alpha shows that analysts expect a deceleration from 22% in 2018 to 11-13% y/y growth in 2019 and 2020. For the reasons cited above, these estimates appear to be fairly conservative and have room for upside given the beneficial secular trends that are benefitting the company.
Facebook's Success is a Risk to Consider
Undoubtedly, the risks around Match are now higher than before the announcement. These risks include:
Facebook has a huge user base and can invest significantly in the space if they choose to do so. Facebook has over 2 billion monthly active users and a hugely profitable platform. If Facebook decides to dedicate itself to dating, they can put a significant amount of resources into it (i.e. it could acquire Spark Networks) and immediately get the feature out in front of billions of people. Facebook could also roll out the feature to Instagram, which has a demographic more aligned with Tinder and users already using the platform for dating.
Dating is closer to Facebook's core use. While Facebook has struggled to see widespread usage of the platform for payments and other features, dating is closer to Facebook's core usage. As just mentioned, people are already using Facebook and Instagram for dating purposes. A more explicit feature could see success. It's also important to remember that Facebook's latest feature, Stories on Instagram, was hugely successful and did stem further growth from Snapchat.
Facebook could offer a differentiated dating experience. Facebook is sitting on a trove of user data, which should in theory make them better suited to potentially match users up based on interests and other variables. This is a significant competitive advantage that other dating apps, despite their claims, simply cannot offer. If Facebook is able to make it work and give users a higher chance of finding the right person for their needs, users could flock to the app, even if they don't use Facebook much anymore. Success could hamper Match's long-term growth trajectory and justify further multiple contraction.
Facebook could see success with an older audience. Even if Facebook's success is limited to an older audience, this could lead to a slowdown in Match's non-Tinder brands. Match has guided to flattish revenue and subscriber growth at non-Tinder brands for the rest of the year.
Headline risk around Facebook announcement. There is some risk around the stock in the near-term when Facebook officially announces the launch of the dating feature and provides more details around how it will work. Until then, the stock may struggle to outperform as investors may not want to take a stance with so much uncertainty.
Real Test Comes Once Facebook Launches Dating App
Match will report earnings after the close on Tuesday, August 7th. Results in 2Q will obviously be watched, but even more important is the 3Q and full-year guidance. Current expectations are for 25% y/y revenue growth in 3Q and 27% y/y growth for the full year. Beyond that, the real test will come once Facebook announces its dating app and we get Match results after the launch. The stock will likely see an even stronger reaction then once we get the first data point on whether the launch is impacting Match's growth.