Bumble shares jump 60%+ in the first day of trading. Should I buy right now?

Following the IPO earlier this week, Bumble shares have opened higher. Jonathan Smith looks at whether the US dating app is worth him buying now.

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Last week I wrote about the Moonpig IPO here in the UK. It’s had a choppy few days of trading, but it’s up from the 410p issue price, now at almost 434p. Another big IPO happened on Thursday in the US. The dating app Bumble (NASDAQ:BMBL) started its new life as a publicly traded company, with a lot of press coverage. Bumble shares attracted interest for several reasons, and finished the day up 63%. Volatility is high when a stock first starts to trade, so early price jumps can be followed by plunges.

What’s the story?

Bumble is an online dating matchmaker. It has stiff competition from from a host of other dating companies. The main USP with Bumble is that women are the ones who make the first move. So if a man and a woman both match with each other, she’s the one who initiates the conversation. 

The USP has stuck, with Bumble going from zero users in 2014 to 40m active users today. Its founder, Whitney Wolfe-Herd, also co-founded Tinder and helped to run Badoo, another dating app. Clearly, she’s very good at what she does, and the success of the company can be attributed largely to her. 

Bumble makes money from users subscribing for more premium services, and in-app purchases. As a private business until this week, it’s hard to find accurate revenue or profit figures. The information I have shows impressive revenue growth, from $10m in 2016 to $240m in 2019. This revenue is expected to grow due to the increased usage of dating apps. Further, the impact of the pandemic could lead to a boom in demand from singles to meet new people.

Are Bumble shares worth buying?

It’s always hard to judge the fair value of a stock that’s just started to trade publicly. The current valuation sits around $10bn, which does seem high in my opinion. However, it falls into the technology space whereby investors tend to value it based on potential earnings several years down the line.

As a more traditional investor, I’m not a huge believer in this style of modelling. Bumble has only been trading since 2014, and has ridden on the coattails of the boom in technology usage. The revenue and user growth year-on-year is impressive, but I imagine it will plateau as it reaches scale.

Another risk I see for the sustainability of Bumble shares going up is user conversion. It’s reported that of the 40m active users, 2.4m are on a paid subscription. As the active user base grows, Bumble needs to ensure the paid subscription figures grow in proportion. This would involve studying particular features of the app in order to target what people would be happy paying for.

Given the positive response on the first day of trading, it shows me that Bumble shares are definitely on investors’ minds right now. I think the success story of the founder is incredible, and that the business is performing well. But given the lack of company information in the public domain, I can’t fully assess it right now. So I’m going to stay away for the moment, and wait for a trading update.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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