Match Group Update: Tinder Gold Is Getting Even Shinier

The last month has been a busy one for Match Group (MTCH). On June 20, the company announced that it had acquired a controlling stake in Hinge, a dating app that previously competed with Tinder. The fast-growing Hinge joins Match Group's large portfolio of dating sites and apps, including Tinder, OkCupid, Match.com, and PlentyofFish.

But even more importantly, the company also introduced several new features for its cash cow Tinder app, with several more currently in the works. Here I review why these developments add significant value to Match Group's services and make the company's stock an even more compelling buy.

The 'Gold' In Tinder Gold

The 2012 launch of Tinder marked a seminal shift in the mechanics of online dating. With its rapid-fire "swipe" feature and double opt-in system, the app brought digital matchmaking into the mobile age and spurred a massive shift in societal attitudes toward online dating.

Ever since then, Match Group and Tinder's managers have demonstrated what Sam Walton called a "bias toward action." The company successfully monetized its free app by introducing an optional premium service called "Plus" in 2015. The upgrade includes features such as unlimited daily swiping and the ability to "passport" to any location in the world.

The launch of "Gold" in 2017 also proved an enormous success, allowing users to bypass the swipe system and directly view profiles of people who have already "swiped right" (that is, indicated interest). A brilliant (and ongoing) marketing campaign tempts users with this knowledge by blurring out the results, which are only viewable once they pay for a Gold subscription.

Adding Value

Recent developments show that Tinder is not resting on its laurels, continuing to add value to its Tinder Gold service and the app in general. Last month, the company launched Tinder Picks, a new feature available exclusively for Tinder Gold subscribers. Picks, which mimics rival app Coffee Meets Bagel, presents users with four profiles daily based on factors such as education, interests, and swipe history.

On July 5, Tinder also rolled out its Loops feature, which it had previously tested in Canada and Sweden, to its global user base. Loops allows users to post two-second, looping videos to their profiles in lieu of a static photograph.

The Q1 earnings call also revealed that the company is testing a "Places" feature, which allows users to see potential matches who frequent similar bars, shops, and other locations. Places is consistent with Tinder's overall strategy to increase user engagement. According to CEO Mandy Ginsburg, the early testing shows that half of users who open Tinder use Places daily. In an effort to take on rival app Bumble, Tinder is also working on an optional feature that allows women to message first.

source: 2018 Q1 Earnings Call Slideshow

Evidence From Financial Results

Although Match Group does not break down results by site, the most recent earnings call provides evidence of the success attributable to Tinder Gold. Gold proved critical to the company's earnings surge in late 2017, and the results since then suggest that Tinder's paid services are "sticky" with its user base.

In Q1 of 2018, Tinder added 368,000 subscribers and delivered its best average revenue per user (ARPU) growth in two years. According to Match CFO Gary Swindler, Tinder's ARPU in Q1 grew 37 percent year-over-year. The company's ARPU as a whole reached $0.58 in Q1 - well above the $0.53 that it achieved in 2017. This growth confirms the company's pricing power, which I discussed in prior articles.

source: 2018 Q1 Earnings Call Slideshow

Unlike other recent Internet IPOs, marketing spend as a percentage of revenue fell sharply in Q1 compared to the same period in 2017. Sales and marketing expenditure rose $11 million year-over-year, and the category now takes up 29 percent of sales compared to 36 percent last year. Match Group's portfolio of sites benefits from strong brands that require little advertising due to word-of-mouth exposure.

With such fantastic economics and a sticky user base, Match Group is significantly undervalued as a company. Yet, shares remain depressed amid negative sentiment surrounding Facebook's (FB) entry into online dating. As I discuss in my May 3 article, the social media giant's move is of little relevance to Match Group's business.

Even though Match crushed its most recent quarter, Wall Street still reacted with a collective shrug. Because of that, the company's valuation is now down to 28 times earnings per share. Given the company's solid fundamentals, this price presents a compelling opportunity to pick up more shares.

Disclosure: I am/we are long MTCH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.