We are fans of both Facebook (FB) and Match ( NASDAQ:MTCH ). Both companies are very similar operating in different industries – Facebook in social media and Match in dating. Recently, however, Facebook has launched its new dating product across the US, directly competing with Match Group and driving shares of Match down from $90 to $75.
Most people are seeing this as a buying opportunity, given that Match’s stock doubled after Facebook first announced the launch of Dating. However, we don’t believe Match is a strong buy at this time after our analysis of Facebook Dating. Yes, Facebook Dating isn’t likely to kill Tinder, but investors seem to be forgetting that Match also owns other dating properties that may be under threat from Facebook. Match’s current valuation is also far higher than when Facebook Dating launched.
Facebook Dating revealed
Facebook discussed its dating service in a press release on September 5. Unlike Tinder, in which users can match with complete strangers after seeing the profile picture + a short bio, Facebook’s service forces you to go onto somebody else’s profile and comment or like in order to make the first move. This encourages users to view the profile thoroughly and take some time to think about their decision before making the first move.
The normal dating feature doesn’t match users with friends. However, users can match with their friends if they both indicate that they are each other’s “secret crush”. People will also be able to share their stories on their Facebook Dating profile.
But it’s hard to deny that the process still depends a lot on physical appearance. The app is constantly updated to allow people to put more photos on their profile, and to make photos display larger in the interface, and there is no real incentive to add much personal information. Most users keep bios brief, and some take advantage of Spotify and Instagram integrations that let them add more context without actually putting in any additional information themselves. – Vox
As you can see from the above, Facebook Dating operates completely differently from Tinder. Tinder attracts more impulsive users while Facebook Dating looks like it is trying to attract users who are willing to do more due diligence. There is likely going to be some overlap between the two apps, but we doubt Facebook Dating will affect Tinder much. As one user put it:
“I have not put a lot of effort into it because to me it https://www.datingranking.net/it/incontri-gay/ does not have a lot of possible bachelors for me,” she said. “I personally believe there is one type of demographic that Facebook Dating is getting and that is the older, possibly middle-aged people.” – CNET
Match, however, is more than just Tinder. It operates eight different services, according to its 10-K, each with a unique twist to it. It owns Match, PlentyOfFish, Meetic, OkCupid, OurTime, Pairs, and Hinge.
Some of these apps skew towards older daters. OurTime, for example, skews towards people 50 and above, the same people who are more likely to use Facebook Dating. Some have similar mechanics as Facebook Dating, using background information to make matches, and some of them focus on long-term relationships, just like what Facebook Dating is focusing on. Hinge, for example, focuses on long-term relationships.
These legacy properties generate around half of Match’s revenues, and with the launch of Facebook Dating, it seems like these legacy properties are under threat. For all the issues with Facebook Dating like privacy, etc., it does have several competitive advantages. It is directly integrated into Facebook’s mobile apps, and with Facebook being used worldwide, it will likely expand very quickly internationally.
Valuation: Another reason to avoid
Match is somewhat richly valued at its current price, with an EV of around $23bil. That’s over 40x net income, which seems extremely high given Match’s limited growth potential.
Match’s US growth is starting to slow down, with growth of just 13% YOY. International is still growing at 27%, but it already accounts for nearly 50% of revenues. It’s hard to see how Match’s international growth can continue after the next couple of years, especially with the market being extremely competitive.
There is also the additional risk that Facebook could launch a dating app through Instagram or even WhatsApp. Remember Stories? That feature is in every app Facebook owns now. With Instagram and WhatsApp skewing towards a younger audience, a dating feature on either of these apps could be quite disastrous for Tinder. It may seem laughable now, but it is a real possibility.
Also note that when Facebook Dating was announced on May 1, Match was trading at a much lower EV/EBITDA ratio than it is today. At its current valuation, the margin of safety is low and downside risk is high.
Takeaway
Overall, Match investors should probably be a lot more cautious of Facebook Dating and its implications. Tinder is safe for now, but the other Match properties could be affected.
We’re not bearish on Match, and we think it has an excellent business model with huge growth potential. But the Facebook risk is just too much to stomach at this inflated valuation. We’ll wait for a correction before buying.
