The dating services giant behind Tinder, Match, PlentyOfFish and OKCupid, saw its stock fall by more than 20% after Facebook CEO Mark Zuckerberg announced that his company would be launching a Facebook dating service in the near future.
Facebook dating, for all intents and purposes, looks and operates a lot like Tinder. Users will be able to create a separate “dating” profile, and then peruse other “dating” profiles based on common interests, likes and events/places.
Consequently, MTCH stock investors freaked out. And with good reason. Just look at the last company Facebook copied. Things have never been the same for Snap Inc (NYSE:SNAP) ever since Facebook rolled out Instagram Stories and WhatsApp Status. In fact, as of this writing, SNAP stock is trading at an all-time low.
Is MTCH stock fated to follow a similar down-and-out path?
Not exactly. But MTCH stock will head lower from here. Here’s a deeper look:
Why Match Group’s Services Will Still Have Demand
Facebook is old, and the people who will likely use “Facebook Dating” will be in the older demographic.
In this sense, Facebook Dating provides a huge and immediate risk for Match. But the risk is less apparent for Tinder, PlentyOfFish, OKCupid, or any of the other dating apps that the Match Group owns and operates. Those services may see some churn from younger Facebook users “trying out” Facebook Dating. But churn should be largely mitigated because of the age difference.
There is also a major goal difference. Tinder and other apps are used largely for hook-ups. Facebook Dating, by allowing only chat messages and having a pool of potentially 2 billion daters, is not a hook-up oriented app.
As such, Match Group’s Services, namely Tinder, PlentyOfFish, and OKCupid, will be “OK” in the face of elevated Facebook competition. Things won’t be the same. Growth won’t be as big. Demand will be lower. But it won’t go away entirely, and the businesses will march on.
Why Facebook Dating Will Erode Some Of That Demand
Facebook has one massive weapon which could create serious demand issues for all of Match Group’s platforms. That weapon is data.
Currently, Tinder and other dating apps rely heavily on Facebook data to populate their own platform. These dating apps often have “log-in with Facebook” features, and allow you to pull photos and information directly from Facebook into the dating app. Thus, the sign-up process is relatively low friction so long as you have a Facebook account (which more than 2 billion people do).
Moreover, these dating apps also use Facebook data to understand who your friends are, and inform you of mutual connections between romantic interests.
Facebook could pull the plug on this data-sharing, and then things could get quite dark for Tinder and others. I mean that figuratively, but it could also be taken literally. After all, Tinder is so reliant on Facebook’s data that the platform temporarily crashed when Facebook changed its data-sharing policies.
More importantly, though, how good is a dating service without data? Not that good. Thus, if Facebook pulls the plug on providing data to Tinder and others, then these platforms will have to collect their own data. That adds friction to the sign-up process, and I’m not so sure individuals want that friction.
As such, while demand for dating apps by-and-large will remain healthy post-Facebook Dating, it will be notably less robust than pre-Facebook Dating.
Why Match Group Stock Is Overvalued
The problem with Match Group stock is that its, at best, fairly valued even without any of these risks.
This is at best a 20% revenue growth company over the next five years (this year’s guide calls for 16.5% revenue growth at the midpoint, so 20% over next 5 years represents an acceleration from current levels). Operating margins have gone from 25% in 2015 to 30% expected this year. Healthy revenue growth should support further margin expansion, so 35-40% operating margins in 5 years isn’t out of the question.
Put those two together, and you wind up with $3.3 billion in revenues and $1.2 billion in operating profits in 5 years. Taking out $100 million for net interest expense, 21% for taxes, and dividing by a presumably higher share count of 350 million, that equates to earnings per share of roughly $2.60 in 5 years.
A market-average growth multiple of 20-times forward earnings on $2.60 implies a four-year forward price target of $52. Discounted back by 10% per year, that equates to present value of roughly $35.
Bottom Line on MTCH Stock
At best, MTCH stock is fairly valued at current levels. That assumes accelerated revenue growth and continued margin expansion while critically ignores any competitive threat from Facebook.
As such, the stocks true fair value rests somewhere markedly lower than $35. That makes MTCH stock a sell here and now.
As of this writing, Luke Lango was long FB.