That news hit Match Group Inc. (NASDAQ:MTCH), of which IAC owns 81%. MTCH stock fell 22%, as investors fear Facebook could be a significant threat to that company’s Match.com and Tinder properties.
It’s certainly possible that the decline could be an overreaction. Facebook obviously has troubles of its own, which as Match and IAC executives pointed out, could make users less likely to give that platform more data. Match and Tinder have established substantial market share in their respective niches on the online dating space.
In fact, I argued back in February that MTCH stock was a buy. And so the pullback might seem like an opportunity to buy either MTCH and/or IAC.
But I don’t think that’s the case. Even with its pullback, MTCH still trades above its levels back early in February. The Facebook threat seems very real. And I’m not particularly interested in IAC’s other properties, such as ANGI Homeservices Inc (NASDAQ:ANGI), Vimeo, and Daily Burn. The best properties — like Expedia Group Inc (NASDAQ:EXPE) and LendingTree Inc (NASDAQ:TREE) — already have been spun off.
IAC did fall a bit further than it should have in theory — relative to the decline in its stake in MTCH. But I don’t see this as a buying opportunity — and if I did, I’d sooner buy MTCH than its majority owner.
Is Facebook a Real Threat to IAC?
Facebook’s move clearly was a surprise, given the reaction in IAC stock. But it makes a lot of sense. As Wired pointed out, Match’s Tinder app relies on Facebook data. So does Bumble, which is engaged in legal warfare with Match after at one point being a rumored acquisition target.
For their part, Match and IAC greeted the news with a bit of snark. Match Group CEO Mandy Ginsberg alluded to Facebook’s data issues in saying that “we’re surprised at the timing, given the amount of personal and sensitive data that comes with this territory.” IAC head Joey Levin said Facebook’s move “could be great for US/Russia relationships.”
But jokes aside, both Ginsberg and Levin have to know that Facebook is a real threat. Facebook’s own first-quarter results didn’t show much change in user behavior amid the data concerns. A free competitor to Match and Tinder — buoyed by Facebook’s extensive data collection and tremendous reach — will be a real rival.
At the least, one might expect that those interested in online dating might try Facebook first, and then move on to Match or Tinder’s premium features if it doesn’t work. And Facebook’s built-in user base and media reach will allow it to advertise its new offering easily and at little cost. (Indeed, the move already has received millions of dollars’ worth of free publicity.)
Facebook won’t necessarily ruin Match’s business. But it does have the ability to have some impact on growth in both Match and Tinder. And given the nature of Internet-centric businesses, where incremental user growth leads to huge profit increases, slowing growth can lead to a substantial change in the growth profile for MTCH.
IAC Stock Isn’t the Right Play
And whatever hits MTCH stock will hit IAC stock. IAC stock closed Tuesday with an enterprise value of just over $12 billion. Its stake in MTCH, even after the plunge, is still worth roughly $10 billion.
The problem for IAC is that the rest of the portfolio isn’t particularly impressive. I wasn’t particularly impressed with Angie’s List before IAC acquired it last year. The rest of IAC’s non-Match properties are relatively small — and providing little growth. If an investor wants to bet that Tuesday’s move is an overreaction, MTCH is the pure play on that bet — not IAC stock.
And even that bet isn’t one I’m interested in taking. I did like MTCH at $34 — but it still trades about 8% above those levels. And as I wrote at the time, MTCH wasn’t particularly cheap then. It still trades at 30x 2018 earnings per share estimates — a multiple that suggests substantial growth going forward.
Match may still grow. The online dating space continues to gain acceptance, and there may be enough room for Match.com, Tinder and Facebook. But the type of growth that is still priced in looks tougher to achieve. And that presents a short-term problem for both MTCH and IAC stock.
At the least, if investors see Facebook as a real threat, that multiple could compress. And that could lead MTCH to fall another 15-30%, assuming its price-to-earnings ratio drops to the 20-25x range. That in turn suggests a 10-20% decline in IAC stock — even if earnings next week impress.
All told, Facebook is a real problem for IAC stock. It upends the near-term story centered around Match Group, and it creates mid- to long-term risk around earnings. If IAC and MTCH were cheaper, that might present an opportunity. But even after Tuesday’s declines, neither stock is cheap. And I don’t believe either stock is close to cheap enough.
As of this writing, Vince Martin has no positions in any securities mentioned.