TIVP037: Match Group (MTCH): Is Finding Love a Good Investment? w/ Shawn O’Malley & Daniel Mahncke

27:28And realistically, they use multiple apps at once, but they only have so much time to dedicate to any single app. With the point being, every minute you're on Tinder, you're not on Hinge, which takes away from Hinge's business. And that is different from LVMH because buying a Louis Vuitton purse doesn't really necessarily have any bearing on your decision to go buy Moet Champagne or Tiffany Jewelry. They are different types of purchases. And there's obviously some overlap across LVMH's brand portfolio, but each brand really stands on its own. And like I said, the purchase decisions are mostly not mutually exclusive.

28:06And on the one hand, consolidating platforms together increases, matches overall reach, obviously, and the size of that network. But I think the unit economics are less attractive because like I said, there's a lot of overlap in users across these platforms and in any organic growth in one app almost comes at the expense of another since the dating app industry itself is relatively mature at this point and not to say there's no organic growth but acquiring truly new and unique users that don't already have a presence on any of the company's other apps is harder and harder for them to do with each passing year so it goes without saying that lbmh is a much much better business than Match Group.

28:48But the idea is the same in the sense that, as you put it, you have this holding company focused on a certain niche that is sort of like a serial acquirer, snapping up brands and trying to elevate them through their existing ecosystem. If I'm not mistaken, though, Match itself is also a spinoff, right? In 2018, Match spun off from IAC. And around that time, Match purchased Hinch. So while Hinch is now the shining star in Match's portfolio, it also wasn't an organic development. They did not build it in-house, in other words. And that's an important note to make because there is a big difference between companies that have a culture and track record of successful innovations and new product launches internally versus being an acquirer trying to make attractive acquisitions at fair prices.

29:36But to go back to the IAC backstory a bit. Really, Match Group's entire life arc is intertwined with IAC, which was born out of Barry Diller's ambition to build an anti-conglomerate, as he put it, that incubates digital businesses and then spins them out. So rather than acquire and develop businesses to hold forever, kind of like the Berkshire model, IAC exists as a vehicle to buy or build up companies before spending them off to shareholders. That is their approach to creating value. And the list of companies that once belonged to IAC is actually pretty impressive, including Tinder, of course, but also Expedia, TripAdvisor, Ticketmaster, and LendingTree.

30:18And those are some familiar names. And now today, IAC is still publicly traded and controls Care.com and Vimeo. And it also has substantial stakes in Angie Home Services, MGM Resorts, and then the car sharing service, Turo that people like to call the Airbnb of car sharing. And as far as we are concerned, the story begins when Match.com launched in 1995. It became an IAC property in 1999 when Ticketmaster Online, which like I said, is an IAC subsidiary, acquired the site. And over the next decade, IAC rolled up almost all of its relationship-focused assets into this dedicated division that it branded as Match Group in 2009.

31:01And then they just went on an M &A tear. They acquired People Media, SinglesNet, and most notably at the time, OkCupid for$50 million in cash in 2011. And by 2015, IAC had decided to offer up 14 % of its stake in Match Group in this late 2015 IPO. Yet it kept all of its class B shares that had super voting rights so they could continue to have full voting control over the company. And post IPO that left this really weird structure where IAC owned 86 % of Match's equity, but had roughly 98 % of the voting power. And the structure was just so messy because where Match reported as a separate public company, they were also a fully consolidated subsidiary on IAC's books too, because IAC has majority control of the company.

31:52And over the next few years, IAC would periodically be tempted to sell small blocks of Match to fund their new ventures and buybacks that they're trying to do. But it continued to retain majority control until 2019 when they signaled it was finally time for a clean break from Match. And they announced these plans to distribute their remaining stake in Match directly to IAC shareholders such that when the transaction closed in June 2020, the shares of IAC someone owned before the deal turned into one new share of IAC holding all the same assets except online dating plus two shares in Match Group.

32:36Sounds quite complex. That's true. And perhaps you should talk about some of the risks because I think this is a company where that matters a lot. I mean, when I think of all the risks Match Group could face, it feels like there are so many of them. it definitely makes sense to go over them one by one and then see how big of a risk that actually is, especially in the long term. So this isn't exactly a company with a long history of operational excellence and all they see, oh, turnover isn't inspiring either. And then there are some major question marks, at least in my mind, generally about the future of online dating and what that might look like.

33:10But I'll pause there to, you know, let you speak, Sean. So what risks we really should focus on and what is the one that you're most concerned about here? If you look at the long-term horizon for magical, but even short-term, if you think of this more as like a turn-around play. It always helps to ease one's mind when we can look back with a company like Adobe and say, okay, almost all their revenue is from recurring subscriptions with clients who, in many cases, have used Adobe products for decades. So even if generative AI changes the way we edit and produce content, we know that Adobe is in a position to respond to those changes from a place of strength, even if they don't end up being a winner in the way we think they can continue to be.

33:51And with Match Group though, it all feels so speculative because online dating barely existed 20 years ago. And the services are largely interchangeable. We know pretty objectively that there's very little platform loyalty. Most people cycle between multiple dating apps. So when we think about the future with augmented reality in virtual reality, in AI agents, it's hard for me to feel as good about Match Group's ability to retain the advantages that it might currently have. But we also don't have to look out into the distant future to find abstract concerns with this company. I mean, part of what has crushed the stock in recent years is that even though top line sales have kept growing, the underlying circumstances look less and less healthy, which is to say the number of people on Tinder who pay for any of the premium services has significantly declined.

34:42And from Q124 to Q125, for example, the number of paying users fell 6%. And so the way they've kept revenue flat to growing is because they've raised prices dramatically for ongoing pairs. But that's not sustainable because you can only raise prices so far if your volumes are falling off with each increase. And there's really only so much juice that can be squeezed without growing the base of paying customers that fundamentally represents their earnings power. And I should say that it's possible that match group is partially disrupting itself. Some of the decline in Tinder payers could be explained by a 19 % year-over-year increase in folks paying for Hinge, though Hinge is growing from a much, much smaller base.

35:26And in other words, Hinge is growing. I mean, it's partially coming at Tinder's expense to the extent that users interested in serious relationships give up on Tinder and migrate to Hinge. And we've got a chart up on screen showing the numbers for those watching on Spotify or YouTube. And I mean, it's not pretty. To be truly bullish on match group long term, I think you have to believe that Tinder's decline can stabilize or be fully offset by Hinge, which it's not totally implausible. But like I said, the picture, it looks rough. So to me, I hear a few different risks. and arguments for the best.

36:05One being that, you know, this is a value trap because Tinder is in secular decline. It is possible for a reverse flywheel to occur that destroys a network like Tinder if people increasingly see it as a place for cheap hookups or a platform that is just flooded by spam and AI. And that seems like an industry problem too, not only one for Tinder, but if Tinder profiles are much faster to create, then there are fewer barriers to spam than let's say on Hinge, for example, where you mentioned it takes three to four times the amount of time to set a profile. And then I also see a risk where Match gets punished even further if Hinge hits any world bumps.

36:43So it sounds like there's a lot of optimism that Hinge can absorb losses at Tinder, while maybe even taking market share from the company's main competitor, which is Bumble. So yeah, any stallout at Hinge could wipe out whatever enthusiasm there is left for the stock that has fallen pretty far from its pandemic highs. So I think there are a lot of things to consider when going into this. You're not wrong. It's been pretty incredible to see the change in the market narrative with this company. Back in 2021, investors were paying more than 130 times earnings for the stock. And now the shares can't get really any love at a very, very small fraction of that multiple.

37:25So on that network effect point, it is just structurally harder to maintain a network effect where there's so much churn in the user base, even with these reactivations that we see. That churn cycle creates opportunities for competition. And if you use mostly Tinder for a while and then got into a relationship that didn't work out, you might then focus on Bumble as a way to change things up or look at maybe getting different types of connections than what you're getting before. which is just to say there's not a lot of ongoing loyalty to any of these platforms. And more realistically, that person is probably using multiple apps, like I said, with little loyalty to any of them.

38:03And AI spam is a particularly big challenge here. If you have the biggest network effect, but your platform gets associated with spam that ruins the user experience, your network effects can evaporate pretty quickly. And I wouldn't think that it's nearly as sticky as some of the other network effects that we've explored on this show. And another thing to mention on top of that too is compensation. While management has presided over a 50 % decline in the stock price in the last three years, its previous CEO earned$45 million during that time. And that's the kind of thing that's just extremely frustrating for long-term shareholders who also try to think like owners of the business.

38:42You're paying a huge price for leadership that was ultimately ineffective. And as a percentage of sales, stock-based comp has nearly doubled since 2021. So the buybacks are great, but they're less productive to the extent that they're just offsetting excessive management comp. And obviously you alluded to it a few minutes ago, but there are more abstract risks around the future of dating. Will AI girlfriends, for example, take a percentage of the population off of dating apps? I mean, it sounds crazy to say, but that possibility seems much more tangible today than even just two years ago, given the progress we've seen in LLMs and image generation.

39:22And maybe first dates will occur in Zuck's metaverse. I mean, I'm skeptical about that, but I do think this is a time for humility. I don't know with a lot of confidence what the dating world will look like in 5, 10, or 20 years. And I don't know if we'll still be scrolling and swiping and using apps in the same way. I mean, I think it really could be dramatically different. And that is what the market is antsy about. It's definitely uncertain, but I just deeply hope AI girl or boyfriends won't become a thing. But we already see a significant shift in how dating works today. That's kind of what he's saying here.

39:57And there's all this data on Gen Z dating trends, where Gen Zs are going on fewer dates than, you know, past generations and not even dating at all. in some cases, to me, that's almost more troubling than the idea that some percentages of Tinder users are going to resign to just having chatbot girlfriends. I think this is something that might be long-term concerning. You're right. The stats are not inspiring. A survey conducted by the Service Center on American Life found that only 56 % of Gen Z adults said they were involved in a romantic relationship at any point during their teenage years. And that's just a remarkable change from previous generations.

40:36More than three quarters of baby boomers and Gen Xers reported having had a boyfriend or girlfriend as teenagers, while 44 % of Gen Z men today report having no relationship experience at all during their teen years. And so that's double the rate for older generation. And Gen Z is obviously very different than any other generation, but we have seen match trying to do some things to address that. Gen Z daters tend to prefer lower pressure interactions. And so the team at Tinder recognize that and develop features like double dating that allows users to team up with friends and match only with other pairs.

41:16And I think that group dynamic just helps to make things a little less awkward and break some of the barriers that can arise with one-on-one matching when you're doing something in a group setting. And like I said, Gen Z doesn't fit the traditional relationship mold to such an extent that many in the Gen Z dating pool don't even necessarily prefer the term dating. Situationship has become as common of an expression. And you're even just saying that you're talking to someone. That's another way of saying that you're in a relationship without something as formal as a dating label on it. And relationship structures then are just less formal, which is probably partly why fewer people say they identify as being in a relationship in a classic sense.

42:00And I guess the point is that this doesn't have to be devastating for match group if ultimately we're arguing about semantics. Tinder and Hinge are primarily used by millennials and Gen Z. whether they call it dating or not, using a service to connect you with other people, I think will always be valuable and maybe even more so in a world that's flooded by AI spam and virtual reality. It's really interesting to me to think about how companies can change behavior at the societal level. For example, in 2012, if you had surveyed a thousand people about whether they had ever paid for ride hailing over the internet, I think almost everyone would have said no.

42:40And so going off that alone, you might have thought, okay, the ride hailing market could never grow beyond just taxis and that it wasn't something that the internet could disrupt. But clearly with Uber, you would be totally wrong about that, such that the total addressable market for ride hailing has grown dramatically because Uber has unlocked new forms of spending and behavior that didn't really otherwise exist. People who had never used taxis now use Ubers because of the convenience they deliver. And so the point I'm trying to make here is, I guess, that the online dating industry does look very saturated in North America and perhaps also in Europe, given that the whole industry is basically stalling out and the growth that Hinge is seeing is, to a large extent, just coming from Tinder or at Tinder's expense, which nets out for Match.

43:25But I do wonder if there is still a larger group of potential users of online dating apps that, for whatever reason, still remains untapped. I saw a Pew research study saying that only 3 in 10 adults had reported ever using a dating site. And I don't know, that sounds quite low to me. But also that figure has remained unchanged since 2019, which I'm sure explains why online dating as a whole just hit a plateau. And that's a conundrum here, right? How do you break the stigma and make online dating more attractive to the rest of the dating population? something like 50 % of people between 18 and 29 have used dating apps, but only 20 % people aged 50 to 64 have, and only 13 % of people above the age of 65.

44:11So naturally, as you move up the age chart, a higher percentage of people are married and therefore not, you know, using dating apps or dating at all. But still, I'm sure there's room for the share of 65 plus year olds who've used online dating to rise beyond one in every 10. And even if it went to two in every 10, that could be millions of incremental new users. It is funny because for a lot of industries and companies, the story that's told is that there will be more adoption by younger users. That's the core focus and narrative. But it's the opposite in online dating. As you pointed out, usage of online dating by folks in their 20s is very saturated, but very underutilized by older cohorts.

44:54even when you adjust for the fact that a higher percentage of older people are not looking for relationships structurally. And part of the bull thesis for Match then is that the demand for senior dating services is higher than ever as America rapidly ages. By 2030, there will be more residents over 65 than under 18 for the first time. And according to Pew Research, 30 % of Americans over 50 are single. And for people over 65, it rises to 36%. And many of them are as romantic as ever, I'd think, and hopeful to find love in whatever season of life it finds them. And yet, when polled, something like 75 % of singles, not just the general population, but singles over 65 years old, said they were not looking for a relationship.

45:42And again, that's a complex thing to diagnose. But you have to think some chunk of that are people who would actually be willing to look for a relationship under the right circumstances, but they just don't know where to begin, which is where the right online dating services can come in for them. And the thing is, 65-year-olds today have had 10 years or so more experience in using the internet than 65-year-olds a decade ago, right? I mean, it's funny to joke that boomers aren't tech savvy, but I do think it's increasingly less accurate to frame older generations as being total Luddites. Someone who is 60 today has potentially been using computers for over 40 years.

46:22So maybe they're not scrolling TikTok and Snapchatting, or maybe they are, but they're definitely not offline in the way that past generations of older people have been. And the reason I say that is I think that it makes it more likely that the percentage of older adults willing to experiment with online dating will rise, providing at least some room for optimism to me that with the right branding and marketing, there are many more people who can be drawn to online dating than currently utilize it. I figured this episode today might take some interesting turns, but I wasn't expecting to go so in depth on the potential to get people's grandparents on dating apps.

47:01But I appreciate the point though. And if there's a tailwind like this for the industry, I think Match should reap much of the benefits since after all the dating app market is basically a de facto duopoly with match group and bumble collectively wielding control over close to 70 percent of the entire market share but i do think we should discuss a bit more on what exactly makes dating such a hard industry to invest in famously a few years ago a16z investor andru chen published a blog post titled why investors don't fund dating where he argues that the reality is that securing funding for a dating product from mainstream venture capital investors is incredibly challenging.

47:43A significant portion of angels and funds categorically refuse to invest in the dating category, similar to how many avoid the gaming, hardware, and gambling sectors. And some of the reasons why are what we have already discussed or covered today. But just to emphasize them again, for starters, he talks about the built-in churn in these product where the better your dating product works, the more of your customers will churn and every churn customer is a new customer you will eventually have to acquire just to get back to even. And that's something you mentioned before. On top of that, paid acquisition, so basically the amount that must be spent on advertising to get someone to try a dating app and city by city expansion have historically proven to be very expensive.

48:28And then there's the stigma that effectively limits virality. Dating apps, you know, they aren't social in the same way that Facebook or TikTok are, since your friends aren't naturally inclined to sign up on Tinder and then invite you to join the app because, you know, dating is such a private and also intimate thing that would be kind of awkward, I think, if you would just, you know, sign up and then invite a friend to also join. It's way easier to send someone a cute cat video that they have to download an app for to watch and then bam they're basically hooked on the tiktok algorithm that's just way more difficult for for any dating app the online dating industry very much has some issues that it needs to address and and some are inherently more addressable than others so for example there there's a bit of a conundrum in that having more options both in terms of dating apps and then just in potential mates on those apps is not necessarily synonymous with a better user experience in the same way that if you go to the grocery store and there's 20 different types of mac and cheese, that's actually maybe not a good thing because it just creates all this decision fatigue.

49:33And like I said, it's sort of the opposite of what you would expect with maybe a normal network effect company where more people, the better. With Uber, having more drivers be able to pick you up makes the service a better experience. And again, that is typical of a strong classic network effect. More supply, more people in the network, that's going to make the service more valuable. But in the past few years, dating at fatigue has emerged as a real issue for match group that needs to be addressed if they're going to rejuvenate engagement. And in 2023, we keep quoting Pew Research here, but they had another survey showing that 46 % of Americans reported their overall experience with online dating as being negative, which was up from 42 % in the same survey from 2019.

50:20And even more concerning than that uptick is that more than half of women reported a negative experience. 11 % of women said that they received threats of physical harm. And 42 % of younger women between 18 and 34, according to Pew, reported receiving explicit messages that they didn't consent to. So I mean, that type of stuff is just totally unacceptable. And it's still happening every day. And 70 % of people think it's common for folks to lie on dating apps to make themselves more appealing. So again, that's a harder problem to solve. And it undermines people's willingness to continue using and trusting online dating services.

50:59So as I was saying, having nearly endless options results in this decision fatigue. And the reality is that women tend to get many, many more likes and messages than men do. Men are typically the ones on these apps trying to catch women's attention. But that can be pretty overwhelming for a lot of female users. And on top of that, it's not just overwhelmed. Something like 53 % of adult women believe that online dating is just simply unsafe. You can't have half the women in a country believe that dating services are unsafe and think that the business will ever scale much beyond its current size.

51:38So they have to change those perceptions. And on the bright side, I will say the percentage of people who think online dating is unsafe drops from over half among those who have never used a dating app to being less than 30 % among those who have used an app at least once. So people's fears do tend to be alleviated pretty quickly after giving these apps to try but still overcoming those initial stigmas makes incremental growth very challenging and just very expensive you know i'm asking myself if not online dating apps themselves are kind of part for the reasons why gen z is handling or tackling dating a bit differently and if that's also just part of the problem and it seems to be a recurring theme here that dating apps are for one just you know a huge upcoming since i don't know maybe 2015 but at the same time, they seem to also cause a lot of problems.

52:31And that's kind of the problem that you have in this business model. So regarding the safety, what can be done to break those stigmas of being, you know, an unsafe environment for women, but also just to make the user experience better on these apps, especially for women. If you've got such a large number of them reporting negative experiences on these apps, even if they don't all flat out think they're unsafe, that just doesn't seem to be sustainable in the long term. Over the past few years, dating apps have introduced a few features to tackle these pain points. For instance, some of these apps now commonly have photo verification to reduce fake profiles.

53:11And there's AI-based moderation to remove harassing messages. And then there are background check integrations that Tinder has used with a company called Garbo that helps to check for criminal records. And they also have a video chat feature that allows users to have a virtual first date safely from their own home. So that is a great way to save time and filter out bad matches before meeting in person. And there's a lot of work to be done to inspire confidence in the safety of dating apps. But some of these enhancements do genuinely increase user trust in the platforms and should make it more likely for them to stick around after they sign up.

53:54And unfortunately, for as good as these initiatives sound, ideas like photo verification have been around for years where you upload a profile pic, but you also have to submit a selfie in real time. And then they match up the photos and decide if you are who you say you are. So it's not a new idea. And if anything, the rollout has been very slow, which is why I would say that generally Match Group has not been an operationally excellent or innovative company like some the other businesses we've looked at together. And that's not to say it can't be a decent investment at the right price, but we do have to be honest with what we're working with here.

54:30Using photo verification was not only a big part of the 2024 product roadmap, but it dates back all the way to 2019 earnings calls where management said, and I have a quote here, they said the following. The second thing we introduced is photo verification debuting on members can self-authenticate through a series of real-time pose selfies these selfies are then compared to existing profile photos using human-assisted ai technology profiles with verified photos will display a blue check mark and the feature is currently testing in select markets and will become more widely available this year so five years later they were still teasing the rollout of what should be a helpful feature but we're not talking about rocket science either.

55:14I mean, I don't know why this would take five years to roll out. It is surprisingly lackluster pace of introduction for, you know, you said it for what should be relatively urgent safety and security features. It seems like a no brainer to get this done as soon as possible. So I'm kind of asking myself, is it really just a lack of operational excellence? Or is there something in the background? How do you explain this to take five years? I do have a theory. I've been reflecting on this a bit and have spoken with some other investors who follow Match. And I just can't help but wonder if I'm overlooking some of the incentives the company may have to actually roll out these features more slowly.

55:57As in, if you think about it, some of the bad actors on these platforms who do things like, you know, spam women with messages and harass them, they also may be some of the biggest spenders on these apps. And we talked about how concentrated spending is here. And I'm guessing, but the people who are most addicted to the gamification of online dating and are spending an order of magnitude more than other paid users, maybe they don't have entirely good intentions. And at a minimum, maybe they just have some obsessive tendencies. And so there's really no nice way to say what I'm trying to say, but you can probably figure out what I mean.

56:35And Match may have realized that some of their most troublesome users are also by far their most profitable. Or even beyond that, you could have accounts that are maybe female that pay for a lot of promotion on the platform for commercial reasons, like trying to use Tinder as a vehicle to promote and draw interest in OnlyFans subscriptions. That is something we've seen a good bit of on Tinder. And so, yeah, I mean, if that's the case, removing these super users wouldn't just pressure Tinder's monthly active user stats, but also is going to hit revenues and operating profits. And I will say I'm reading between the lines a lot and I'm at risk of over speculating.

57:17But just even the fact that dramatic conflict of interest is plausible, I think is a troubling dilemma for shareholders because the company's short-term incentives, like reaching quarterly earnings targets, may not actually align in maybe the opposite of really what's most important longer term in creating the safest and most trustworthy platform possible that would have the greatest earnings power. So that makes me a little bit nervous. Talking about these super users and maybe the more obsessed ones, if you want to say so, I think you mentioned there are certain subscription models that can cost hundreds of dollars per month.

57:59And I think it's not too far off to assume that people who pay those might use Tinder and in other apps differently than most quote-unquote normal users. And when you have a dynamic where such power users are responsible for the vast majority of your profits, you are, I think, in a pretty bad position as a company. And yet I've seen some, on the other side of things, very promising stats for online dating too. Something like 35 % of online daters have paid for a premium feature at least once. So there's actually a pretty good chunk of people who pay through these premium models. And actually, I read that in the US, 10 % of all partnered couples originally met online.

58:39So having one in 10 relationships, tracing back to Match Group or Bumble for the most part, that's just a lot higher than I would have expected it to be. And it seems like a great endorsement of the product. Kind of like you said, when people meet, maybe they marry. And at the end, that's kind of an endorsement to the product, to the company. And it's kind of a bit of backlash to all the negative things that we point out. on these apps. And on top of that, you have this trend where globally people are marrying later and spending more years single in young adulthood. And there was a Cosmopolitan report recently finding that many Gen Z and young millennials are no rush for long-term partnerships.

59:1838 % reported viewing marriage and partnership as optional rather than essential. And that might sound bad for online dating at first, but actually it could extend the period of active dating and therefore mean that people use dating apps in different ways across longer periods of their lives on average. And as you said, the most important customers are not the ones trying to find long-term partnerships. Those are not the ones paying these huge amounts for those apps. I'm pretty conflicted, honestly, because I do see an industry, some really undesirable incentives and realities. And yet I also see an industry that is maybe more promising than most people currently give it credit for.

1:00:00We can buy a stock like Match Group at a very reasonable price, even all things considered. It reminds me a lot of the Roku pitch from a few weeks ago where there's something really interesting here. It's also hard to get totally comfortable with what you're buying. This is a company that would probably be much better off being private, where they can be removed from the Wall Street spotlight and stop worrying about quarterly earnings and instead just focus on doing things that maybe will actually hurt the business today, but are crucial long-term, like more safety features and removing troublesome users, even if some of them generate the highest ARPUs.

1:00:35And I should say the key difference from Roku and why I find this even more compelling is that, as you said, the valuation is just so reasonable and the company is so profitable. They spit off a lot of cash and that can be used for dividends. And we saw them announce a dividend for the first time late last year. So without any growth, they can actually generate pretty attractive returns just by returning cash to shareholders. And I think that dividend there is actually a sign that they expect to be a public company and are not planning on going private. And even though I don't have a ton of faith in management really making material improvements in the business, there's always a possibility that they do or also that the company gets acquired and maybe taken private at a premium to the current price.

1:01:19even if I don't like all the turnover at the top of the company and don't think they've got the best team of product engineers in the world shipping innovative ideas consistently. They do deserve some credit for what they did with Hinge. When Match first acquired a majority stake in Hinge in 2018, they did so at a valuation of$25 million and it was the 13th most downloaded dating app in the US. So for Hinge to now want to be the most valuable dating apps in the world, that is a real masterstroke of a deal and the execution of it. And I actually checked the app store earlier on my iPhone before we jumped on the call and hinge ranks above Tinder now for top dating apps.

1:02:03So they took a fledgling dating app and they turned it into a multi billion dollar enterprise. And since 2020 earnings per share of compounded at 30 % a year, while the total shares outstanding are down 6%. So the earnings have been growing and they're making material buybacks to shrink the share count, even if earnings fell off a bit from 2023 to 2024, which is partly why the market has soured so much on the company. And to put that differently, when you zoom out, there are some things to really like about Match Group. And the picture is probably not as bad as you'd think, given the valuation and the fact that the stock is down almost 70 % in five years.

1:02:41I was actually surprised when you first told me you pitching match group I thought it was just a bad business which is also not you know producing so much cash but they actually are and if they're producing that much cash if they're giving back to shareholders and if the valuation is as good as it seems to be you know why don't we start talking more about the valuation part I think we've danced around long enough so why don't you get into the valuation more show us your model. It sounds like the picture is very mixed, but if your model confirms that the stock is actually as cheap as it looks, then that certainly makes the pitch significantly stronger, right?

1:03:18So where did you land with your model? One of the things I quickly noticed is that this is a company that does substantial stock-based comp that we mentioned a bit earlier. But when you adjust for that and subtract that expense from free cash flows, Match still trades at an adjusted free cash flow yield of 9%. And if you buy the stock today, 9 % of your initial purchase price could be returned to you by the way of dividends or share repurchases within one year and so on from there. And as long as the business doesn't dramatically contract, you're buying it at a price where you immediately expect a nearly double digit return without banking on any future growth.

1:03:59So even if stock-based comp is 30 % of free cashflow, there's still plenty of free cashflow otherwise being generated to offer an attractive yield. And obviously that yield is even higher if you use the free cashflow number that's not adjusted for stock-based comp. But I know that's not how we like to roll, Daniel. We like to treat stock issuance as a real cost to shareholders. So we can't just write it off. But looking at the whole business, it's a hard stock to model because you have all these different dating apps under one roof and some are growing, some are flat and others are in decline.

1:04:32They all have different trends in being able to extract more or less revenue per paying user too. So without really being an expert on what's going on at Hinge versus Tinder versus OkCupid versus Match.com in Asia, it was hard for me to get comfortable modeling anything that wasn't just a basic extrapolation of what had already been happening at these different segments in the past few years. And with Tinder, for example, which makes up most of their revenues, despite multiple CEOs and waves of new product innovations and safety improvements, they have not been able to arrest the decline in the total number of monthly users on the platform and the number of paid users total.

1:05:13And so something about Tinder just doesn't resonate with people in the same way anymore. And Tinder is basically in free fall at this point. And so it's impossible to say where it will bottom. It's even harder to predict if and when they can resume growth. So I just tried to modestly assume that some of their new initiatives can slow the rate of decline and they can continue to offset that a bit with higher subscription prices too, while the number of users continues to go down over time still. And conversely, I tried to make conservative estimates for Hinge, showing that the company has a lot of room yet to grow, but decelerating some of that growth over time.

1:05:50And again, I should say that this is a company whose future did 180 degree pivot from the outlook in 2021 to 2023. So that's why I say I have little confidence in knowing what can happen by 2029. Things can change dramatically again. It could be a growth stock again in three years. So anyways, as a base case, I have match group compounding revenues at three and a half percent a year through 2029, which may be optimistic if Tinder continues to fall off we're actually dramatically pessimistic if the tender business stabilizes so tender is really the big question mark that that is the unknown unknown and so i also wanted to bake in some modest increases in the exit multiple where assuming tinder's platform does stabilize to some extent the market is then going to naturally reprice the company from a multiple that's reflecting terminal decline to something that is at least a little bit higher for a more stagnant version of Match's business.

1:06:50And the point being, without assuming any kind of huge turnaround, really, just that they can keep growing hinge and slowly decline in tender on top of the current rate of aggressive buybacks and dividends at pretty low valuation multiples. I don't think on paper, it's a stretch to say that it looks like a promising investment. I mean, from today's prices, I suspect this company could generate 15 % annual returns over the next five years or so without heroic assumptions. You don't sound too bearish, I might say. So doesn't that mean, you know, you're not sounding too bearish plus a 15 % annualized estimated return that you would recommend us to add Match Group to the portfolio?

1:07:30I would just credit the lack of bearishness to the fact that I'm so genuinely conflicted because I keep going back and forth because I mean, to answer your question, no, I think this is going to be one of those cases where I advise that we actually don't go solely off the model because I think it is really easy to say, yeah, you know, the new CEO can slow Tinder's decline. And maybe that's true, or maybe it's not true. You know, maybe in the same way that Blockbuster or BlackBerry couldn't really be saved, the same is true for Tinder. And from what I've heard in Ernie's calls and at their investor day, nothing has really inspired me to believe that Tinder is going to turn around in the foreseeable future.

1:08:10And Hinge, no matter how promising it is currently, has a long way to go before it can fill the hole in Match's business model being left by Tender. So I have very little confidence in their game plan going forward, other than just generally betting on mean reversion. And that's why I don't think it's appropriate to recommend the company at the moment. And And kind of ironically, maybe by next year, if we see signs of tender stabilizing at that point, the stock will definitely jump. But I would rather pay a higher price at that point in time when it's clear that the core business isn't in terminal decline.

1:08:49Instead of buying a business where I'm really just hoping the core business doesn't get cut in half in five years. Even if the valuation looking at trailing financials is very attractive and would lend itself to high forward returns. I guess it's also questionable where Tinder's growth would be coming from. I mean, right now we see Tinder in decline and hinges benefiting. But if Tinder starts growing again, is it Hinge in decline then? Or is it just the overall industry getting much better? I think there's a lot of uncertainty baked into that. And I mean, Match Group's story over the last five years is really a cautionary tale on blindly extrapolating forward growth trends.

1:09:29getting excited and then paying an outrageous multiple for a company only for the stock to fall 70 you would think that earnings would have fallen by a similar amount but it's it's really mostly just a contraction in the multiple on current earnings it's not like the business itself has imploded but the market seems to be expecting that as a possibility or at least is reacting very negatively as the stock gets re-rated from being a growth bet to basically being a value bet at this point. And yet for as painful as it has been for Match, Match is much more diversified than Bumble, for example, and the market has recognized that.

1:10:05So even though Match's price to free cash flow, multiple looks depressed, it's not bad at all compared to Bumble. And that makes sense because Bumble primarily only has one platform, meaning if for whatever reason Bumble fades in popularity the same way that Tinder has, the company is pretty much dead. And with Match Group, they have a number of other apps to fall back on and have a new growth engine, for example, with Hinge, if Tinder is not doing so well. But yeah, where Match trades at 9 to 10 times free cash flow, Bumble trades at only four times free cash flow. For a company that's expected to continue growing free cash flow over the next 18 months, a 20 % free cash flow yield is quite a thing to see.

1:10:46I don't think I've seen that ever before. And to connect it back to Match, even though it sort of feels like the variation for Match can contract much further, the stock could get cut in half if the market is pushing it down to the same multiple as Bumble. So even after a big drawdown that we definitely have seen, and a very reasonable valuation at first glance, there's still precedent for much more downside. As you said, looking at a chart of match in Bumble's valuation multiples is kind of a scary thing to see. I'm sure no one who bought Bumble in 2021 at 200 times free cash flow thought it would fall to four times free cash flow.

1:11:29Even if they knew they were buying at an expensive price, even if they knew they were getting ripped off and paying a crazy premium, who would have thought that it could fall that far? That is almost ridiculous. So yeah, that's where we are. And that is literally what happened. So it's one of those things where you don't want to catch a falling knife. Absolutely. It's just a hard to understand business and even harder to understand industry. And you know the business better than I do, but I'm kind of glad you don't recommend adding it to the portfolio. It's possible this business will see an acceleration of growth at some point, but I don't think that's the most likely outcome.

1:12:07And to me, it feels like the multiple is not necessarily too low for a company with the problems of match and just a business model that generally seems to be, I don't know, kind of hurting itself at some point. And if there's no multiple expansion, I doubt that growth alone would deliver a satisfactory return, at least for the returns that we look at. And that's not to say there's no potential upside. I definitely see how this stock could be or could trade much higher, but I don't think it has the same asymmetrical nature as some of the other turnarounds we looked at. I mean, you mentioned a 9 % adjusted free cash flow yield, and we got PayPal at an adjusted if we cash for you at 7.5%, depending where the price is, closely to 8%.

1:12:49So if I see that and I compare the business models, I'm still more confident that PayPal has a better future than these dating apps. Personally, I couldn't tell you why, but perhaps you see it differently. I just think there's more risk involved here. I think instead of setting this truly in the too hard pile, because sometimes we look at companies and we're like, okay, this is going to the too hard pile. And realistically, we're probably not going to look at this again. With Match, I agree that structurally it's not a great business. Yet at the same time, I think the valuation more than offsets that, such that I want to genuinely keep following the company just because of my own curiosity.

1:13:33Now I feel so invested in the tender story. I really want to know if they can turn tender around. And at that point, depending on where the valuation is, I think I genuinely would be inclined to consider maybe repitching it for the portfolio or at least for my personal portfolio because I kind of feel like in in the intrinsic value portfolio we're looking for compounders and this is not necessarily that obviously yes I would agree I think we do not only look for compounders there are some companies in there where I would say okay it's a mix out of a company that could turn around and then continue to compound or perhaps it's just a good turnaround story but I agree with you.

1:14:12If I could see Tinder to re-accelerate its growth and at the same time it's not at the expense of Hinge so you basically see both apps doing way better which would only be possible if the industry itself is having some form of tailwind. I could definitely see how this is way more attractive than it currently is and as you said we might pay up a bit in price at that point but we would have so much more certainty on the long term outlook. I could get on board with buying the company at those points. Well, folks will have to stay tuned. I don't think it'll be happening anytime soon, but maybe over the next 12 months or so, we'll get some real clarity on what's going on at Tinder.

1:14:50But maybe we won't. I mean, there's been a couple years of uncertainty. So I don't, that's the problem. I don't know when or if we'll ever get a clearer picture of what's going on at Tinder. Because if it keeps falling three, four or five percent year over year, every single year, it's just really hard to get comfortable entering the company. So with that, how about you give us your hints for next week's episode pitch, Daniel? Well, the company I'm going to pitch next is definitely a lot less controversial than this one. It's probably the least controversial company you could pitch. And it's definitely known by all of you at home.

1:15:28For some reason, though, you still rarely come across pitches for that company. At least I don't see them too often. And anyway, you and I said at some point we have to cover it. And I think it's time for that. It has seen what might be the most polarizing or at least not popular, but it was some eyeballs that the CEO announced a transition this year. So I guess there's a lot to talk about in the next episode. And I don't know, in our community, those hints might already be enough. What do you say? I think knowing your pick, that's a good way to dance around it. So on that note, let me leave you with a quote to close things out.

1:16:09And this is from Mark Twain. And he says, you can't depend on your eyes when your imagination is out of focus. And I came across this the other day after listening to a podcast about Mark Twain's life, actually. And I just love the quote. And not because Twain was a great investor. He's actually a very bad investor. But because it's so easy for our excitement or our fears about owning a company to distort how we see reality. And what we see when researching a stock can really look different depending on our emotional state at that moment. And given all the stigmas and preconceptions about online dating, looking at a stock like Match Group really requires us to ensure we're truly seeing financial reality and economic reality for what it is and not being too emotionally biased in one way or the other by the fact that, oh, I used a dating app and I didn't like it or I used and that's how I met my wife.

1:16:59I mean, those anecdotes can be helpful, but ultimately I think they blind us more from objectively what's going on than they help. So by the way, we should mention if you are interested in joining the latest cohort of members being admitted into our intrinsic value investing community, you can learn more at theinvestorspodcast.com slash intrinsic value community. And of course, we've got the link for that in the description below in the show notes. And with that, we will see you all again next week.