IAC/InterActiveCorp Stock Predictions: Swipe Right

I Know First Research Team LogoThis article was written by the I Know First Research Team.

IAC Performance vs S&P 500 and NASDAQ 100 over the past twelve months  [Source: Yahoo Finance]

Summary

  • IAC is a holding company that owns more than 20 operating businesses comprising over 150 brands – this includes Match Group which owns Tinder, the world’s largest online dating platform
  • For Match Group as of March 31, 2019, IAC’s economic interest was 80.4% and IAC’s voting interest was 97.5%.
  • Tinder and other dating platforms are benefiting from secular tailwinds and have a massive runway of growth ahead
  • All of IAC’s other brands, many of which also have exciting upside, provide optionality at a reasonable price
  • IAC’s stake in Tinder is starting to look a lot like Nasper’s legendary bet on Tencent
IAC’s Family of Brands

In November 2015, IAC listed Match Group, owner of Tinder amongst thirteen other online dating brands including Match.com, OkCupid, and PlentyOf Fish. Match Group stock popped up 23% on IPO day from their initial listing price of $12. and since then IAC’s market capitalisation has followed Match Group onwards and upwards.

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IAC ‘s 254.72% return since Match’s Nov ‘15 IPO (365.7% return) vs NASDAQ’s 46.90% & S&P’s 32.23%  [Source: Yahoo Finance]

Match Group spawned from the desktop-based Match.com, and the group now owns multiple dating platforms, and is the market leader in this industry which is benefiting from a once in a generation shift to online dating as it becomes  mainstream – these massive secular tailwinds have been driven primarily by smartphone usage and cheaper mobile data, as well as people simply having more time for entertainment.  

Although it is by far and away the market leader, Match products still have a long runway of growth ahead as the industry grows. Match had 8.2 million subscribers on average when measured in Q4 2018 [Source: Match Group Business Overview March 2019]  Match Group owns four of the top five onlien dating brands in the US, based on respondents who used dating products over the past 90 days. [Source: AppAnnie August 2018 data]

Source: Match Group March 2019 business review

Tinder is the #1 downloaded and top-grossing dating app worldwide. [source: Per AppAnniefor the last twelve months through December 31] 64% of relationships started on online dating platforms originated from a Match-owned product [Source: For the last twelve months: Quarterly Pulse U.S. Survey (August 2018)].  

Match Group’s 2012-launched Tinder App is the jewel in the Mach Group crown-Tinder made online dating ‘cool’ and moved it into in the mainstream.  Tinder is the #1 downloaded and top grossing dating App worldwide [Source: AnnieApp for the last twelve months ending 31 Dec 2018] and is the second highest grossing App overall worldwide across all apps, excluding games. [Source: AnnieApp for the last twelve months ending 31 Dec 2018].

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Source: Match Group Business Review March 2019

As the most well-known dating app brand with the most users, Tinder benefits from the network effect as singles seeking exposure to the highest number of other singles will engage with the Tinder App as a priority before competitors. The App is used in more than 190 countries and each day 1.6 billion matches are made on Tinder. The success of Tinder has resulted in its founders suing Match Group for $2bn.

Once In a Lifetime Transition To Digital Introductions

All dating apps are now benefiting from secular tailwinds driven by smartphone technology and the proliferation of cheaper mobile data availability. Prior to the proliferation of smart phones, online dating was not mainstream as there was the inconvenience of conducting communications at a desktop computer. With the convenience of mobile phones, online dating is no longer perceived as an anti-social activity that takes place in quiet corners of studies and bedrooms where desktops happen to be set up. With mobile phones, people can swipe and interact with absolute convenience as they transit to and from work, in the company of friends, and in any other number of sociable settings.  

There is a long runway for growth. In North America more than half of singles having never tried online dating platforms, and outside North America this figure is two-thirds, which is comparable to the level of North America usage prior to 2012 when Tinder was founded.  In India only 11% of singles, and in Japan only 17%, have ever used a dating app platform before [source: Match Group survey contained in March 2019 Match Group business review].  The under-penetrated APAC/Africa/Middle East/LatAm region is a massive opportunity comprising approximately 75% of the world’s singles.  

There is also increasing multi-app usage by singles so Tinder does not need to be all things to all people to continue growing its user base impressively.

Source: March 2019 Match Group Business Review

There is an immense transfer of value occurring from the places where singles would previously initially meet (for example bars and clubs) to the online space. In effect Tinder represents all the real estate value of many thousands of watering holes around the world combined. Notwithstanding that Tinder is already the second highest grossing non-gaming app in the world, it is quite difficult to value the real estate that Tinder represents, particularly because Match Group is at such early stages of monetization.

Monetization of Tinder only began in Q1 2015 and grew to over $800m annual revenue in 2018. A small proportion of Tinder’s users pay to use the apps service, and advertising revenue streams have not been well developed yet. A very successful step in monetization and value growth for shareholders was Tinder Gold, where users may a higher subscription fee than even Tinder Plus, so that they can see who has already liked them.. The overall number of users on the platform amounts to only the annual college graduating class in the US; there is so much room for growth, and the marginal cost to add users is almost zero. Indeed the adjusted EBITDA margin has expanded from 31% to 38% from 2015 to 2018.

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Source: Match Group Business Review March 2019

The secular move towards meeting one’s match online, whether for casual or serious relationship purposes, should be expected to continue, since statistically there is a far greater chance of finding someone compatible from a greater sample size. No physical-meeting-place can rival the number of people with a presence on a single app, which also offers far more convenience.  It is hardly surprising that outside gaming a dating app, Tinder, is the second highest grossing App worldwide. There is hardly more powerful a force than that driven by the human need to establish a romantic connection. This is also what drives household formation.

A Buying Opportunity Thanks To Facebook

Recognizing the value to be realized in the online dating area, Facebook announced in May 2018 a dating feature was to be developed. This caused an immediate negative impact for Match Group’s market cap followed by an extended overhang in the stock which has only dissipated somewhat following the most recently announced results. So far Match Group has reported no noticeable impact to revenue from Facebook’s dating feature, which is the clear under-dog.  This is not surprising given that this is not Facebook’s area of specialization, and the general concerns about Facebook’s management of personal data. Facebook’s dating feature is providing a mechanism for existing friends to become romantic partners. That is not what Match Group’s products focus on at all. The conclusion is that Facebook’s announcement has provided a great buying opportunity for the stock.

Not Only Revenue Growth

Like Facebook, Match Group not only boasts revenue growth, but also profit growth and positive free cash flow growth. Match Group’s revenue growth is impressive thanks to crown jewel Tinder, and unusually for a high revenue growth business founded only seven years ago, there is expanding EPS growth as well, in addition to ever more impressive positive free cash flow. This impressive cash and profit position should not be taken as indicating a lack of investment to stay ahead of the competition, but rather is a testament to the elegant simplicity of this great business.

Unlike Facebook and others, the majority of Match Group’s revenue is subscription based, which is more stable than ad-based revenue.

IAC’s other businesses besides online dating

Based on IAC’s current valuation, the market is valuing its interest in Match Group at approximately $16bn, and attributing a total valuation of around $3bn to the rest of its businesses. IAC divides its owned brands into four other categories besides Match Group for reporting purposes. Whilst Match Group has the most exciting prospects and is the focus of this article, a total valuation of $3bn for all other businesses (which are also digital businesses that have good growth prospects and benefit from scale of users over time and a fixed cost base) means there should not be concern from a valuation point of a view for a prospective owner of IAC stock seeking exposure to Match. On the contrary, at this valuation for all the rest of the businesses, it could be argued there is more optionality in buying IAC stock as apposed to Match.

Final Thoughts

IAC is the primary beneficiary of Match Group’s ascent, which is almost entirely thanks to the success of Tinder, the world’s leading mobile-phoned based dating platform. Tinder was established in 2012 and only monetized in 2015, and is already the second highest grossing app worldwide outside of gaming. But it still has only a few million subscribers and there is an enormous runway for growth. The elegant simplicity and outstanding economics of Match Group’s business is reflected in not only impressive revenue growth, but also earnings and free cash flow growth – much like Faeebook. But unlike Facebook, most revenue is more stable as it flows from subscriptions rather than ads. Tinder and all other mobile-based dating platforms are benefiting from secular tailwinds thanks to the proliferation of smart phones and cheaper and unlimited mobile data.

All of IAC’s businesses other than Match Group are available at a valuation that does not make owning IAC a riskier proposition than owning Match Group directly, if anything it provides more optionality for upside. IAC’s interest in Match Group is starting to look like Nasper’s legendary position in Tencent

I Know First Algorithm is currently bullish on IAC/InterActiveCorp

My bullish endorsement for IAC/InteractiveCorp is backed by the positive algorithmic forecasts from I Know First. The 1 month, 3-month and 12-month algorithmic forecasts for IAC are all positive. The underlying future trend is that this stock is likely to go up in price.

My bullish endorsement for IAC/InteractiveCorp is backed by the positive algorithmic forecasts from I Know First. The 1 month, 3-month and 12-month algorithmic forecasts for IAC are all positive. The underlying future trend is that this stock is likely to go up in price.

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Please note-for trading decisions use the most recent forecast.