There is no price on love which is why Hyperconnect’s $1.725 billion price tag was but a ''formality'' for Match Group. After a successful Bumble IPO, and with Valentine’s day just around the corner we now turn our attention towards Match Group (MTCH).
Key Takeaways:
- Hyperconnect improves Match Group’s position in Asian markets and provides more liquidity.
- Japan is now Match Group’s second largest market after North America.
- Average revenue per user grew 5% over the year to $0.62.
- Total revenues expanded 19% from Q4 2019 to Q4 2020.
- Q4 saw 10.9 million new users with 5.8 coming from Asia
Tightening grip with Hyperconnect…
A couple of days ago Match announced its $1.725B acquisition of Hyperconnect, a South Korean app developer. With Valentine’s day this weekend, we thought it would be relevant to dive into Match Group and explore the business. If you remember from our Bumble S-1 review article the online dating scene is competitive. The image below is a reminder roadmap and clean illustration of the size of Match group. The company is the worldwide leader in online dating products by total revenues, monthly active users, and paying members. The group owns and operates some of the most well-known brands like Tinder, Match and Hinge. People from all walks of life, even Celebrities and politicians, use their apps frequently.
Kink in the demand…
Match announced a 50% cash 50% stock acquisition of Hyperconnect. Hyperconnect is a high growth app developer building two social discovery applications with usage and revenues mainly coming from Asia (about 75%). This corporate marriage is meant to close in 2Q21. This new relationship will introduce different monetization tools for Match as Hyperconnect sees 90% of its revenues from virtual gifting and in-app decorations purchases. Match saw about 17% of revenues coming from Asia this past year and the company has always highlighted its intent to bolster this figure to 25%. Hyperconnect reported sales of $200 million with a 50% growth from one year to the next and analysts are predicting similar levels of growth for the next two years with 2021 potentially racking up $300 million in extra income.
Making the bottom line…
4Q was a solid period for the group. Sales were up 20% from one year to the next, and even beat expectations with $651 million and profits of $140 million. International revenue growth was much improved too, an important piece of the puzzle for a large group like Match. Asia saw enough growth to position Japan as 2nd largest market for Match’s operations. Pairs and Tinder both saw great market penetration in Japan over the past couple of years, despite cultural barriers, with revenues climbing 600% over 5 years. COVID-19 has it made it challenging to meet in real life, but compared to the same quarter a year prior, downloads of Match Group subsidiaries rose 63%.
However, headwinds continue as lockdowns continue to plague the industry and vaccine distributions are slow to expand. Average revenue per user increased primarily due to features and optimized pricing at Hinge and live streaming video at PlentyOfFish and the international ARPU was favorably impacted by the strengthening Euro. ARPU last quarter grew 5% over the year to $0.62 per user and total revenues expanded 19% from Q4 of 2019. This past quarter saw the addition of almost 11 million new users with the international segment seeing 5.9 million add ons. With this growth also came a growth in costs and expenses, as one usually brings the other up. Operational expenses rose 20% from the same quarter last year and mainly so because of increasing in-app purchasing fees.
With revenues reaching $2.4 billion in 2020 profits came in at around $553.9 million for an average profit margin of 21%. Estimates indicate this figure could rise to $2.8 billion in 2021 which could see operating expenses grow from current $1.65 billion levels more than $2.0 billion assuming 21% profit margins. Earnings were weak in the first quarter of 2020 but saw an upswing in results in the last two quarters thus seeing annual earnings per share at $0.58 for 2020. The P/E ratio for 2020 is 309x earnings, with lower estimates of 72x for 2021. Debt to assets was 118% in 2020.
Love and hate…
Upside is that MTCH is highly profitable and generates substantial cash flow. It is virtually a monopoly on the online dating scene and has a well-diversified portfolio of companies tackling different populations and testing out different strategies. The firm will possible be the primary beneficiary of growing social acceptance of online dating and M&A activity is a real threat to other competitors like Bumble. Despite being on top, downside risks do not spare MTCH. Market share losses to emerging dating businesses like Bumble who recently saw a successful IPO, and new entrants, remains a real constraint as the company cannot buy them all. Costs of customer acquisition for mobile users could prove to be painful and costly and an extended outbreak of COVID-19 could further restrain the group from further capitalizing on user growth. Since the company relies heavily on its champion Tinder, any hiccup in revenue from Tinder could prove to be a challenge for the stock.
