Match Group Has Potential, but Don't Commit Yet

Ali Mogharabi: On the back of online dating becoming mainstream, Internet and mobile device users increasing globally, and the growth of the singles population worldwide, Match Group, with its portfolio of online dating brands, has become the leader in this space. We think the firm has carved out a narrow economic moat, thanks to network effects which continue to drive top- and bottom-line growth, generating strong returns on invested capital.

The firm, of which 83% is owned by IAC/InterActiveCorp, has more than 45 brands of online dating sites and/or apps, including Tinder, Match.com, and PlentyOfFish. We believe by creating and acquiring various online dating products with each serving different people in terms of demographics, Match Group successfully created a network effect for its entire portfolio of services that is becoming more mainstream. The worldwide addressable market for Match Group's dating business is between $3 billion and $6 billion.

Match Group's dating portfolio has four of the top five brands in North America, and Tinder actually remains the world's number-one downloaded dating app.

Growth in the firm's users will also drive advertising revenue growth. We expect demand to increase mainly for Tinder ad loads, as advertisers will utilize Tinder's valuable user behavior data to target the app's millennial users more effectively.

We also expect the firm's network effects to help Match Group further consolidate its brands' technological infrastructure, make it more scalable, and streamline its operation more effectively, creating operating leverage.

While we remain confident in Match Group's stable and narrow economic moat, we recommend a wider margin of safety before investing, as the shares are trading in 3-star territory.