Updated: Mar 4
Cautionary statement: This article aims to analyse two growth stocks on a relative basis. Investors should be aware that the multiples the market is willing to pay in terms of price to sales (P/S) or price to earnings (P/E) for growth companies have risen significantly over the last few years and could represent risk going forward.
The online dating market is still in its relative infancy. OC&C Strategy Consultants estimates the global market value (excluding China) at $5.3Bn growing to $9.9Bn in 2025, representing an annual growth of 13%. In an interesting reversal of age adoption to technology, it seemed that the over 40s were the first mass adopters of dating websites in the 1990s and 2000s, visiting sites such as Plenty of Fish or Match.com. In more recent times, rapid growth has come from Millennials and Gen Z downloading ‘swipe dating’ apps such as Tinder. As of 2020, there is an estimated 190 million Monthly Active Users (MAUs) of online dating platforms and the market is dominated by a large incumbent force: Match Group. Match Group is listed on the Nasdaq exchange and this holding company owns many of the global dating brands, including Tinder. In an age of ever increasing digital presence, online has now become the number one method of meeting a partner, and I would expect the coronavirus has only increased the extent to which singletons have needed to digitise their love lives.
Last week, Bumble ($BMBL) had an initial public offering (IPO) on the Nasdaq stock exchange in North America. Like many recent technology IPO’s, it got off to a pretty buoyant start, accelerating from the listing price of $43 to $75 at the close on Friday. Bumble owns two popular dating platforms, its namesake, Bumble, and Badoo, a leading dating app in Europe and Latin America.
Bumble is a mission-based company, and both its dating apps are focused on trust, safety and meaningful relationships, which are very admirable goals. However, the online dating market is competitive, and Bumble will have a tough battle to take market share from the current incumbent.
Match Group is the market leader in the online dating world with revenues of $2.4 Billion. 45 different platforms sit under Match’s corporate umbrella, the most significant platforms being:
Tinder — the number one grossing app worldwide (in any category)
These apps cover a broad spectrum of interests, whether that be for more casual ‘hook-ups’ or for serious relationships. Numbers from sensortower.com, a source referred to in the Bumble IPO prospectus, rank Tinder and PlentyOfFish as #1 and #3 in terms of global downloads. The sheer size of Tinder should not be underestimated. The app delivered $1.4Bn in revenue in 2020 and has had 400 million downloads since launch, with an estimated 57 million MAUs, which is a large gap between the next largest app Bumble. In 2018, to improve its offering, Match Group acquired Hinge, a new dating app focused on relationship-minded millennials, likely to be a better competitor with the offerings available from Bumble.
Let’s take a look at the financial data to understand a little more about the prospects for each company. It is worth mentioning that as Bumble is yet to report 2020 results, we are reliant on 2019 results and expectations for 2020 and that 2020 expectations are forecasts and could be subject to change.
Looking at Bumble first, you will see the company as a whole has had top line growth of 36% in 2019. This actually hides a more impressive figure for the Bumble app, which grew at 69.7%. Badoo, the more mature platform with a larger but less monetisable audience, generated 8% growth in the year. Looking at expectations, growth at Bumble is set to moderate to around 19% for full year 2020. Bumble is now a profitable company, with positive net earnings and adjusted EBITDA margins of 20.8% which are above the average S&P500 company.
Match Group on the other hand is a more mature entity. It’s growth is still impressive, but more steady around the 17-18% mark for 2019 and 2020. This is an impressive feat for a company with a large scale and more mature products to be delivering a high teens growth rate. Match Group also has the upper hand when it comes to profitability; a 38% EBITDA margin is much higher than new entrant Bumble, and will provide Match with many leverage points to utilise their superior cash conversion to keep the gap between them and competitors as wide as possible.
In 2020, Match group spent $479 million on sales and marketing expenses vs only $169 million in product development. To me, this explains that the business of online dating platforms is very much driven by marketing spend rather than the underlying product. Network effects are key — people want to be on platforms that the most people are on. Bringing this back to the financials, one can see that the clear issue for Bumble is navigating the increased need for marketing spend, whilst protecting profit margins.
In summary of the financial data, Match Group is the clear winner. Better profitability matched with consistent growth at a high rate of 18% is preferable to Bumble’s higher initial growth rate, which will temper to a similar level to Match, but with lower profitability — especially given the fact Bumble may have to sacrifice margins even further to promote growth.
However, investment decisions shouldn’t be based purely on financials, so it is important to consider other factors before deciding which companies have the best investment proposition. Looking at the operational strengths and weaknesses for each business can aid our analysis.
Bumble Operational Strengths:
Mission based — Bumble has clear authenticity of creating a better world for relationships
Strong growth in core Bumble app
Founder Led business, creating alignment to the long term success of the company
Focused on two successful dating platforms
Bumble Operational Weaknesses:
Small portfolio of platforms
Performance weighed down by muted growth at Badoo
Large gap in MAUs compared to market leader
Match Operational Strengths
Track record of delivery and brand building
Large portfolio of platforms to cater to changing needs of prospective users
A global #1 app in the dating category
Non-Tinder business growing at same rate as Tinder
Aggressive acquirer of new platforms
Match Operational Weaknesses
Lack of mission/authentic feel to improve relationships
Growth in Tinder moderating over the years
Reliance on Tinder creates risk
Looking at these operational qualities, I think the two companies are on equal footing. The brand value Bumble has garnered from its mission to improve dating for women is unrivalled and will generate a significant pull towards its apps, in the words of Bumble — ‘where women go men follow!’. However, I am sure it is not as clear cut as this; many successful relationships are created on other platforms, and I am not sure all women would want to be the ‘first to move’ in any case. Match Group clearly excels in its diverse offering of platforms, track record and sheer popularity of Tinder. On the negative side, Bumble is weighed down by paltry growth at Badoo. An opportunity would be to reignite revenue growth here, or continue to focus on growth at the core Bumble app, with the intention of lowering the contribution from Badoo and eventually pursuing a spin off. Match Group clearly lacks the mission driven qualities of Bumble, but arguably this hasn’t tempered the success of products like Tinder.
We also have to consider the risks to both companies, and their chances of being able to mitigate them. News of Facebook’s desire to enter the online dating market sent shockwaves through the industry in 2018. Match Group stock fell by 20% on the announcement. An important risk identified in Bumbles IPO prospectus was the following: 'The dating industry is highly competitive, with low switching costs and a consistent stream of new products and entrants, and innovation by our competitors may disrupt our business.' I think Facebook adequately proved this point. Although this risk will always remain present, Match Group has been in business since 1995, and Bumble and Tinder are now power brands meaning competitors would have to spend a lot of money to up-seat them. However, it does not take up-seating an incumbent to cause chaos for their shareholders. Intense competition can reduce profit margins, and investors tend to dislike any news of a slip in profitability.
Finally, we must consider valuation. The price we are asked to pay for each company will contribute to our investment decision. At the closing price on Friday the 12th of February, Bumble was valued at 19x 2020 sales, with Match Group also trading at 19x 2020 sales. Compare this to the S&P500 average of roughly 2.75x Sales — it is fair to say that these companies are trading at a hefty premium. Bumble was listed on the Nasdaq at $43 reflecting a more reasonable 13x 2020 sales, but trading in the secondary market quickly lifted the price to $75 and therefore increased the valuation. Bumble’s lower profitability ratio also reflects in its EV/EBITDA rating of 120x vs 64x for Match Group.
In conclusion, at today’s valuation I believe Match Group pertains to be a better investment. With both companies trading at a similar price, and both companies exhibiting similar long term growth rates, Match Group has much superior profitability and importantly a diverse set of successful platforms that will be key to keeping abreast of changing customer preferences over time. Revenue estimates may change for both companies — Bumble could grow rapidly. However, I would consider it difficult to grow at exponential rates, without denting profitability — something they have signed up to protecting by listing on the stock market. If Bumble were to be trading at a lower valuation, more reflective of its ‘challenger’ status, I would be open to reconsidering.
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The Twenties Trader owns neither Bumble or Match Group.