A Logical Business Model With An Irrational Valuation
Match Group (MTCH) has been one of my top picks in the market for some time, but given the increasing volatility and the decreasing sanity of the valuation, I am no longer able to stand behind it. The company is a strong name in a rapidly growing industry with the potential for future growth. They have a demonstrated track record of in-house incubation and development, and there is significant potential for growth from developing markets. That being said, it has become a clear momentum play, and I do not like the prospects of owning the stock at a high relative premium, in the event we see macro-weakness in the near term.
Do Not Underestimate The Mainstream Adoption Of online dating
The retail community continuously misunderstands and applies a biased approach in the appraisal of the value of the Match. Common mistakes are assuming that Match.com is a proxy for the performance of the entire portfolio, that Tinder is filled with fake profiles, or that because they do not use these platforms that adoptions must be sluggish. While there is some validity to the problem with fake & predatory profiles in online dating, the idea that the more mainstream platforms (Tinder, Hinge, Ok!Cupid, etc.) are being used only by a deviant subculture is simply incorrect.
The graphic above shows the adoption of online dating has teetered between the second and third most common ways heterosexual couples have met in the recent decade and now accounts for almost 70% of same-sex relationships. The catalyst for adoption is increasing the levels of privacy, convenience, and a way to pre-qualify relationship opportunities.
A heterosexual male could go to the bar, spend money and time on drinks, and hope he meets a single woman who has an interest in him, that he can effectively communicate with her in that environment, and while risking embarrassing rejections or interference from friends. Alternatively, he could go on his phone, pre-screen women with a mutual attraction, arrange a meet-up already established as a date, and do so with complete privacy from the outside world.
Similarly, a member of the LGBTQ community could save significant time and frustration by selecting a screen that only shows singles with their same sexual orientation. Additionally, this protects those fearing discrimination both in the form of pre-screening and by providing that added layer of anonymity.
I theorize that the reason you do not hear more about online dating in day-to-day life is that it is still viewed as something that is a bit taboo. If a coworker were to ask you what you are looking at during lunch, “I’m browsing Facebook” (FB) might save some of the discomforts that saying “I’m swiping on Tinder” could cause. Additionally, many in the previous generation view online dating as something for misfits and social outcasts, and as a result, I’ve seen many couples lie about how they met, often citing the place they met up for their date rather than the platform. I think this might also be why you see a positive correlation to the number of respondents citing “restaurants” as their place of meeting, as this is common first date.
Buying Growth Without Concern For Valuation Is Reminiscent Of Netflix
Netflix (NFLX) is the first company that comes to mind when I look at the valuations of the peer group. The stock is trading at insignificant earnings multiples but has an Enterprise Value to Revenue multiples of 12x vs. the peer group average of about 7x. This is coupled with a top-line growth rate that really isn’t all that impressive vs. some of its more mature and less debt-encumbered peers. In fact, when looking at the sources of sales, it becomes clear that Tinder is acting as something of a crutch on which the company’s growth is leaning. Investing at these levels is showing confidence in the joint probability that the company will unlock yet to be realized channels for growth and that the integrity of the valuation premium will remain. While I can get behind the first half of this thesis, I do not like investments build on a foundation of sand or, in this case, momentum.
I use Netflix as a comparison here because it too found itself in a similar position. The company was traded at a high premium to its peer group in the mid-teens vs. the mid-upper-single-digits, and the downturn in market sentiment, which has hurt many firms, caused Netflix to drop from a 52-week high in the $370s to its current price in the $260s. That is approximately a 30% loss. One could also look to Roku (ROKU), a stock that I’ve raised valuation concerns over for months. Yes, the stock ran up from the mid $60s to over $160, but in less than one month, it dropped from a high of $161 to a low of $99. That is a loss of approximately 40% in less than 30 days because the price is being driven by momentum, and there are no fundamental safeguards in place.
Compare this to Facebook, a stock that had a high around its then fair value of $210. It has since dropped as low as $176 per share, which is only a loss of about 16%. The reason for this difference is that if you believe in any level of market efficiency, then you believe that over time the market tends to price companies correctly. If a company is trading close to fair value, then in the event of a sell-off, it will eventually drift back towards that fair value level, and if it has continued to grow, then you will experience some as well appreciation. This happens because when good companies get too cheap compared to peers, at some point, investors recognize the opportunity and they act accordingly. However, if the company was overvalued, to begin with, then it’s a journey back to breakeven in the event market pricing corrects to align with peers.
Valuation And Interpretation
Source: Contributor Research (Calculated from data retrieved from Edgar)
These figures above represent the current state of the peer group as of the close of trading on October 8, 2019. As you can see Match Group is on the high end of each of these measures and is the highest in terms of Enterprise Value to Revenue. You see the stock is currently being given a 12.71x multiple vs. its peers which have a median of 7.09x. I use the median here because this removes some of the impacts of the outliers. This paints a bit of a concerning picture in the event the company was to correct to levels closer to peers.
Source: Contributor Research
The table above shows the calculated implied relative fair valuation of the company’s shares, assuming $2.43 billion in sales for the year 2020 (Analyst Consensus from Bloomberg). In this instance, I am not using this method to show you my expectations for the price of the stock, but I am doing this to show you just how expensive the trading levels are right now. In the event we see the market contracts, the company continues to grow as expected, and shares recover, but only to the level of peers, you would be looking at a share price in the neighborhood of $62, give or take 5%. Make no mistake, that is a real possibility. Yes, its industry is growing, but compared to this same peer set, its actual sales growth is on the low end, as you can see below.
Wait For An Additional Growth Catalyst Or For Price To Approach Fair Value
I like Match Group as a company and I understand the value proposition that investors see in the stock. For me, it comes down to the risk/reward parity. Do I feel comfortable holding this stock in a time when I am uncertain about the market? For me, the answer is no. I don’t want to pay a premium when I am concerned macro valuations could contract, given that I don’t know if the premium will return when the dust settles after the recovery. I am not suggesting anyone short this stock, this is one of the most heavily shorted stocks on Wall Street, with a percentage of shares short float of 58%. This is a statistic which I attribute to the frequency of rapid spikes in volume and valuation around each earnings disclosure. That being said, I am saying that I am not of the opinion that this is a safe stock to own. If you are going to go long on the name, the spikes in volatility are high enough that I think that a slightly out of the money few future-dated puts would be a good idea for those deciding to act on a potential reversal in momentum. I understand the stock has a dedicated community and following, and that they can get defensive of this name. I want to make it clear that this is not a sell recommendation, it is a warning and a rationale as to why I do not plan on owning the name anytime soon.
Disclosure: I am/we are long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.