Match Group Inc (NASDAQ:MTCH) is not one of my favorite companies, to say the least. Here are MTCH’s Q2 numbers, and then I’ll break down why I’m not impressed.
Revenues increased to $301 million from $249 million, year over year, an increase of 21%.
This led to net income of $34.1 million, or about $0.13 per share, an increase of about 50% on a net income basis, but flat on an earnings-per-share basis. That’s due to a massive shareholder dilution of almost 40%, with the addition of 96 million new shares issued.
You’d think that online dating services would be insanely profitable. There is never a shortage of the love-lorn, the supply is being constantly replenished and people will pay to find the right partner. MTCH has over 45 brands in 109 countries, including Match.com and Tinder, and it has been cobbled together by making one acquisition after another.
Strategically, there’s value in gobbling up every online dating service to become the single dominant owner. MTCH is indeed that, owning about 25% market share. The downside is there is also cannibalization that can occur across brands. When people get frustrated with one service’s results, they switch to another.
That can create other problems, because the average revenue per paying use for MTCH fell 10% year over year (in Q1) and 5% in Q2, and that’s likely the result of such cannibalization and by focusing more on the lower-cost brands of MTCH.
The CEO tries to pooh-pooh cannibalization at MTCH, but what’s known as “soft wall” products are growing faster than “hard wall” products — the former being a free offering of the product without all of the functionality you find in the latter.
The Big Issues With MTCH Stock
The thing about MTCH stock is that of the 60 million or so monthly active users worldwide, only about 10% are paying customers. So, while MTCH stock is increasing revenues year over year and even quarter to quarter, it had been coming at a significant expense, which had been killing the bottom line.
Fiscal year 2013 revenues were $803 million, growing to $888 million in FY14 and to $1.02 billion in FY15. But on that 25% total increase in revenue, selling, general and administrative expenses increased 30%, from $415 million to $535 million. Research and development also increased by almost 50%, from $43 million to $67 million.
The result is that net income in FY13 was $125 million and in FY15, it was $120.4 million. However, something interesting happened this quarter. MTCH barely lifted its expenses. There was a $12 million increase in cost of revenue, but selling and marketing didn’t change, and G&A only increased $2 million. R&D only increased $3.5 million. So the profit is strictly the result of cost cutting. Can this continue? Is this the new normal for expenses? We don’t know.
There are other big problems with MTCH stock. It is loaded with debt — almost $1.2 billion of it. It is trying to refinance some of that debt with a $400 million bond offering, but the rate is effectively in junk territory — 6.375%. It has $1.3 billion of goodwill on its balance sheet from all of its acquisitions, almost a third of its market cap.
IAC/InterActiveCorp (NASDAQ:IAC) owns 84% of the company, but has 98.2% of the voting interest. So MTCH stock shareholders have no effective say in how the company itself is run.
Lingering over the company are also privacy issues that, I believe, create a massive hidden risk. As I wrote earlier this year, I’m concerned that MTCH suggests it doesn’t share data between online test-prep service Princeton Review (also a money pit) and its dating sites, when Tinder suggests that data sharing does occur in its TOS:
“We may collect both personal and non-personal information about you from other Match Group businesses, business partners and other third parties …We may share personal information with… Other Match Group businesses. We may share information we collect, including your profile and personal information such as your name and contact information, photos, interests, activities and transactions on our website, with Match Group companies.”
My objection is whether Princeton Review, which services young kids, is sharing data with its hook up dating sites, and whether that has been disclosed. That creates another level of risk.
MTCH stock is already overpriced on no real net income growth. The privacy issue just makes things worse. I suggest selling MTCH stock, and possibly shorting.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
