Relationship George, Or: Why We Learned to Stop Worrying and Love Match Group
We recently published a write-up outlining our thesis on Match Group $MTCH
Here is a link to the report: https://www.archcapitalfund.com/letters
Read the full report for the details, but our thesis can be summed up in a few parts:
- Dating and romantic relationships are permanent parts of society. Online dating is well on its way to becoming the dominant form of matchmaking, giving the apps a stranglehold on the single population worldwide.
- Match Group owns all the big dating properties outside of Bumble, Badoo, and Grindr.
- The stock trades at a reasonable EV/FCF of 37 if you believe revenue can continue growing at a solid double-digit rate (are assumptions are 20% a year).
- Tinder still has a long runway to grow payers users. In 2020, less than 50% of 18 to 29 year olds in North America had used a dating app. It is much lower in most international regions. Over the next decade, we think that number will get close to 100% single people worldwide.
- Hinge is growing revenue 100%+ year-over-year and is now the second biggest service in the Match Group portfolio. The app only started heavily monetizing just before the pandemic and is rapidly displacing Bumble as the 2nd most popular dating app in English speaking markets. In 2022 and beyond, Match Group plans to bring Hinge to international markets. While a bit less predictable than Tinder, we believe Hinge can become another $1 billion revenue business for Match Group within three to five years.
- Match Group has a clear path towards margin expansion given how asset-light the business is. It should do 35% - 40% margins once it matures, even with app store fees of 20% - 30% around the world. If app store fees get regulated lower (not something we are banking on) margins should shoot north of 50%.
- Match Group has multiple competitive advantages. Most important are the network effects of its apps, which are incredibly powerful. Tinder has a highly defensible position from other dating apps with similar demographics/user propositions because it is the app with the highest supply. Every incremental user makes the app better (in theory) for existing users, creating a winner takes most scenario.
- Most importantly, Match Group has a unique competitive advantage called "Relationship George" that gives it a defensible position against other consumer internet companies like Facebook. We explain further in the report, but this video sums it up: https://www.youtube.com/watch?v=3afZip4BTRc
- We conclude the report with major risks/concerns, which we think lay in execution and the FCF multiple of the stock right now.
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