There's a lot to learn from this racy four-bagger.
Customers of internet dating operator Cupid (LSE: CUP) no doubt occasionally regret the one that got away, the great love affair that might have been.
I have similar feelings about its shares. They first caught my eye in June 2010 at 60p, but I was too shy to act. By September they were up to 100p and I concluded they could grow rapidly, but the risks were significant. Too racy for me, I let the opportunity pass. Now they're 204p, having touched 250p. I could easily be sitting on a two-bagger: timed well, I could have even quadrupled my money.
Cue much angst and wringing of hands! But we learn from our mistakes, in investing as well as in love, so what lessons can I draw from this?
Online dating
It's not that I have doubts about the online-dating business. It has experienced phenomenal growth as the stigma associated with lonely hearts columns has been swept away by the all-pervasive internet. For the generation growing up with Facebook, online and real-life social interactions are interchangeable. That makes for a global online-dating market estimated at $3-4 billion annually.
Nor could I fault Cupid's strategy of growth by acquisition, in a market that is highly fragmented apart from a couple of large US players. Barriers to entry are low, at least on the technical side of things. So value lies in customer lists, and the business benefits from a 'network effect' -- the more visitors a website has, the more attractive it is to new visitors. Consolidation is inevitable, and it becomes a race to grow the fastest.
Growth
Cupid's growth, by any measure, has been impressive. It floated on AIM in June 2010 as Easydate. That caught the eye of easyGroup's lawyers and the company agreed to change its name to Cupid, having acquired companies of that name in the UK and US. The company divides its market into traditional, casual and niche and, apart from Cupid.com, its main websites include BeNaughty, Girlsdateforfree and Flirt. No-one could accuse it of being overly coy.
International expansion has been boosted by recent acquisitions in Germany and Brazil. In the first half of this year, the company met its objective of earning 50% revenues from outside the UK. Revenues were nearly tripled to £25.4m, and operating profit doubled to £3.9m.
The company now has more than 34 million members in 39 countries, but only a tiny proportion of those generate revenues. There were 460,000 monthly subscribers in June 2011, up from 324,000 last December. More than 40% of users now access the company's services through mobile devices or its Facebook app.
Doubts
And therein lie my doubts. The business model, based on making money from internet subscriptions, looks decidedly rickety to me. Think of Friends Reunited, the subscription-based internet success story -- until it became an internet disaster story for ITV (LSE: ITV), which bought it for £175m and sold it for £25m. The generation that lives half its life online through Facebook and Twitter expects everything on the internet to be free.
The rapid switch from website to mobiles and Facebook just reinforces those doubts. Isn't it really Facebook that has the membership list?
Fickle
It seems to me that the use of technology by consumers -- especially younger ones -- is particularly fickle, prone to rapid change and difficult to predict. It's why I'm cautious of technology shares.
Exceptionally I got myself comfortable with innovative chip-maker IQE (LSE: IQE) a month ago, in which time its shares rose 40% and promptly fell back, in part due to shifts in the market share of various phone manufacturers. And I'm still bemused at how rapidly the BlackBerry went from being the corporate phone to the street phone.
I'm at odds with the market, which is right now valuing a lot of future growth into Cupid's share price. The historic PE is 43, dropping to 21 on forecast earnings. Though maybe non-exec Martin Higginson has sympathy for my view: he sold his remaining shares at 245p in September. To be fair, the two founders still own more than half of the company.
Of course, the real lesson here is that I should have no regrets. Investment is a balance of risk and reward, and you have to choose what level of uncertainty you can live with. You should invest in what you feel comfortable holding for the long term. It's a lesson for Cupid's punters as well as for investors.
More from Tony Reading:
> Enjoy The Motley Fool's latest tech report -- 3 Ways To Profit From The iPhone Revolution -- it's free!
> Tony owns shares in IQE.
