The Perfect Time to Buy Match Stock Is Long Gone

Yesterday, shares of Match (NASDAQ:MTCH) popped on an otherwise down day for markets after the online dating giant reported fourth-quarter numbers that impressed investors and included a healthy subscriber growth outlook. MTCH stock rose more than 5% in response.

Ostensibly, the numbers look pretty good. This is a 20%-plus revenue growth company with a rapidly growing subscriber base, improving unit economics, and strong margins. Plus, there are secular trends underpinning the growth narrative here that imply that Match will remain a big revenue growth, healthy margin expansion company for a lot longer.

But, the truth is that the time to buy MTCH stock was back in late 2018 when the market was freaking out about the potentially slowing growth at Tinder against the backdrop of a decelerating global economy. At that point in time, MTCH stock was closing in on $30, had a historically very low 25X forward price-to-earnings multiple, and was 40% off recent highs with technically oversold conditions.

A lot has changed since then. For starter’s, MTCH stock has almost doubled. All those fears about Tinder slowing down are gone. The sentiment is broadly bullish. The P/E multiple is approaching 35, a level which the stock has failed to consistently hold before, and technical indicators imply that the stock’s 30%-plus year-to-date rally has pushed it into technically overbought territory. Fundamentals appear maxed out, too.

In other words, I’m concerned that this rally in MTCH stock is on its last legs. It’s technically overbought, the narrative could take a turn for the worse in 2019, and long-term fundamentals don’t support much more near- to medium-term upside. As such, this post-earnings pop may be a good time to take some profits off the table.

Technically Overbought

Technical indicators don’t determine the long-term direction of a stock. But, they do tend to predict near- to medium-term movement pretty well.

Right now, those indicators are flashing a sell signal on MTCH stock. Namely, the Relative Strength Index on MTCH stock has jumped above 70, which is traditionally considered overbought territory. Historically speaking, whenever the RSI in MTCH stock has jumped to these levels, the stock proceeded to pullback over the subsequent several weeks.

Also, MTCH stock is now 20% above its 50-day moving average. Over the past several years, this is about as far as Match’s stock price has diverged from its 50-day moving average. Whenever this 20% divergence has occurred, MTCH stock has normally proceeded to pull back over the subsequent several weeks.

Trends Could Change Course In 2019

Another big problem with MTCH stock here and now is that the narrative could take a turn for the worse in 2019.

For most of 2017 and 2018, the narrative underlying MTCH stock was broadly positive, driven by robust growth at Tinder thanks to Tinder Gold. Long story short, the launch of Tinder Gold supercharged Tinder paid subscriber growth and Tinder ARPU, the sum of which led to robust revenue and profit gains at Match.

But, there are signs that this gold rush will come to an end in 2019. Tinder added just 233,000 subs this past quarter and it is expected to add just over 250,000 next quarter. That is roughly in-line with the long-term average of 200,000 to 250,000 new subs per quarter for Tinder. But, since the launch of Tinder Gold, Tinder has been adding, on average, over 400,000 new subs per quarter.

Those days are over. Thus, it isn’t surprising to see ARPU growth, revenue growth and margin expansion all slow, too. For the past several quarters, this has been a high single-digit ARPU growth company, 20%-plus revenue growth company and big margin expansion company. Now, Match is turning into a low single-digit ARPU growth company with mid-teens revenue growth and a flattening margin expansion trajectory.

This narrative flip in 2019 will likely have a negative impact on MTCH sock.

Fundamentals Imply Fully Valued

Most importantly, the long-term growth fundamentals underlying Match stock do not support much more upside in the near to medium term.

The Tinder Gold rush sparked consistent 20%-plus subscriber growth at Match. But, sub growth slowed to the mid-teens rate in the fourth quarter of 2018, and the guide implies that mid-teens sub growth will be the new norm going forward. If so, 20 million subs by 2025 seems achievable, versus just over 8 million today.

Meanwhile, ARPU growth is slowing, too, and without another big paid subscription service catalyst, ARPU growth should continue to run in the low single-digit rate over the next several years. If so, ARPU could trend toward 70 cents by 2025.

Under those two assumptions, Match should be able to do over $5 billion in revenue by 2025. Adjusted operating margins will likely trend toward 40% by then, making $5 in earnings-per-share seem achievable. Based on a digital service average 20X forward multiple, that equates to a 2024 price target for MTCH stock of $100. Discounted back by 10% per year, that equates to a fiscal 2019 price target of just over $60. We are nearly there today, and the end of fiscal 2019 is still twelve months out.

Bottom Line on MTCH Stock

Match is a long-term winner that is dominating the secular growth online dating industry. But, that doesn’t make MTCH stock a buy here. Instead, the time to buy MTCH stock was at $30. Now, up at $60, it’s time to sell. There will be a big dip in 2019 that will give investors a much better entry point.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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