Multiple missed mega-trends

First up is Intel (NASDAQ: INTC), the chip company that will be familiar to most. Indeed, as I type this, there is an Intel sticker on the laptop telling me there’s Pentium processor inside.

Down nearly 70% over five years though, the stock’s struggled for eons.

However, Intel was once the world’s undisputed chip titan before badly losing its way. There are a few reasons why, but basically it took its eye off the ball and executed poorly.

For example, it missed the biggest consumer tech wave of the century — smartphones — and later lost Apple as a customer for Macs (in 2020). Then it failed to lead in the artificial intelligence (AI) revolution, losing out spectacularly to Nvidia.

Under the previous CEO, Intel attempted to enter the third-party chip manufacturing business to take on Taiwan Semiconductor Manufacturing Company (TSMC). That also hasn’t been a success, pushing the firm to a $2.8bn loss in 2023, its first annual loss in decades.

In recent days, the firm sold a 51% stake in its Altera programmable chips unit for $4.46bn. Perhaps it can use this cash to pursue growth avenues and reinvigorate the business. However, it’s worth noting that Intel paid just under $17bn for Altera in 2015. So it’s selling a majority stake at a lower valuation.

Given the long-standing record of poor innovation and capital allocation, I have no intention to invest.

Swiping left

The name Match Group (NASDAQ: MTCH) might not be immediately familiar, but dating app Tinder probably is. The company owns this, as well as Hinge, Meetic (a leading dating service in Europe), and many niche apps.

Over the past five years, Match stock has crashed 70%. This is largely because the company’s number of paying users has fallen for several consecutive quarters, including on its flagship Tinder app. 

Having said that, the company’s still profitable. This year, it’s expected to generate earnings per share of about $2. That puts the stock on a low forward-looking price-to-earnings ratio of 14. That’s the sort of multiple I’d expect to see from a FTSE 100 blue-chip, not a Nasdaq tech share!

Meanwhile, there’s a 2.6% dividend yield. So on this basis, it could be said that the stock offers decent value.

The issue I have here though is that there seems to be a paradox at the heart of the business model. Most of Match’s apps are purportedly there to help users find a partner. But once they do, they delete the app.

So when the product works, it loses users, which is unlike most successful digital platforms (Netflix, YouTube, etc). And if it isn’t effective, users burn out or become disillusioned (especially men, who make up the bulk of Match Group’s paid subscriber base).

In 2023, group revenue was $3.4bn. This year? It’s forecast to be $3.4bn.

I think the paradox I’ve just described is why the company has failed to scale like other tech platforms, despite owning nearly all of the most popular dating apps. Therefore, I continue to avoid the shares.

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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.

The post 1 share down 77% that I wouldn’t touch with a 10-foot pole in today’s stock market! appeared first on The Motley Fool UK.