Sometimes what might seem like a ‘no-brainer’ stock market investment turns out to be anything but. To my mind, Match Group‘s (NASDAQ: MTCH) one such example.
The company dominates the online dating market through apps such as Hinge, OkCupid, and Tinder (still the most downloaded dating app worldwide). At first glance then, this stock might seem like a solid play on the digitisation of dating.
Yet it’s been a terrible performer, falling from a peak of $169 in 2021 to just $38 today. That’s a heartbreaking 77% crash!
Why have investors fallen out of love with Match Group stock? Let’s take a closer look.
Unattractive growth
One likely reason for Match’s poor performance is slow growth. In the second quarter, revenue rose 4% year on year to $864m. And the firm expects third-quarter revenue of $895m-$905m, compared with prior Wall Street estimates of $915m.
Looking further ahead, forecasts don’t get the heart racing. Annual revenue of $3.4bn last year is expected to grow to just $3.5bn this year, then $3.8bn next year. So we’re looking at single-digit growth.
On the positive side, the company operates a capital-light platform and remains solidly profitable. It’s expected to generate over $1bn in free cash flow this year. This means the stock’s currently trading at approximately 9 times forecast free cash flow. Admittedly, that looks great value.
The firm also started a new $1bn share buyback programme earlier this year. So there are some things to like here.
Red flags
However, I’d say there are more things to be worried about. One is that Tinder downloads dropped 12% globally last quarter, marking the fourth consecutive quarter of decline. Even more concerning, paying Tinder users fell by 8%, down to 9.6m, and this followed a 9% drop in the previous quarter.
Total paying users across Match Group came to 14.8m, down from 16.5m in 2022. Not a great look.
In response, the firm’s been raising Tinder subscription prices to bolster earnings. But dating apps thrive on network effects, as users gravitate toward platforms with the most potential matches. Therefore, a shrinking user base and decline in paying customers are clearly causes for concern.
I’m swiping left
One bright spot has been Hinge, where revenue rose 48% in the second quarter. However, Hinge’s motto is ‘Designed to be deleted‘, as it aims to get people together and off the app. That’s an admirable mission, but it doesn’t really get me excited as a potential investor.
Furthermore, it’s well-documented in studies of dating apps that a small fraction of users receive the majority of attention. As Tinder continue to increase prices, users may become more reluctant to pay for premium services that don’t consistently yield satisfactory results. Indeed, I think this is what we’re seeing.
Wall Street also doesn’t expect much growth from rival Bumble. And I think the main problem in this industry for a stock-picker is that there are very low switching costs and barriers to entry. That is, users aren’t loyal to one platform and new dating apps can suddenly pop up and steal market share.
As an investor, I prefer high switching costs and significant barriers to entry. Therefore, I think there are better growth stocks out there for my portfolio.
