This growth action has market potential

Investors can earn life-changing returns by buying the right growth stocks and holding them for decades. These companies are rare, but typically belong to fast growing industries, have high profit margins, and (at least in the 21st century) are using the internet to its full potential. A company that fits this bill is Match group (NASDAQ: MTCH), a conglomerate of dating apps from InterActiveCorp (NASDAQ: IAC) last summer.

Here’s why Match Group stocks have the potential to beat the market.

Image source: Getty Images.

The domination of Tinder

Currently, the majority of Match Group business comes from Tinder. Tinder is well known as a dating and relationship app targeting young people. When Tinder first started, its users used the app for free. However, over the past few years, Match Group has rapidly increased the number of paid subscribers on Tinder. In the last quarter, it had 9.6 million payers (Match Group definition for the number of people who pay for Tinder products), up 17% from the previous year.

Looking back a few years, this is remarkable growth for Tinder’s paying customer base. In 2015, the app had only 376,000 paying subscribers (a somewhat different term from “payers”) and only 3.7 million in the second quarter of 2018. With less than 10 million people paying money for the products Tinder for around hundreds of millions of downloads. the world, there’s no reason to believe that Match Group won’t continue to increase the number of Tinder payers over the next three to five years.

In the last quarter, Tinder generated $ 399 million in direct revenue, up from $ 276 million in the same period two years ago, even with headwinds induced by the pandemic / lockdown. If Tinder can double the number of its paid users, it’s possible that the app will generate $ 1 billion in quarterly revenue over the next five years.

Rise of the rest

Until recently, Match Group’s big growth story was really just Tinder. But over the next five years, its fastest growing business will likely come from its other portfolio of apps.

First, we have to highlight the resurgence of legacy services like Match.com and OkCupid, which actually increased second-quarter sales to $ 192 million. These legacy businesses won’t grow much for Match Group, but they can be steadfast cash cows.

The exciting strengths lie in what Match Group calls its emerging brands, which include the fast-growing, relationship-driven app called Hinge. Hinge is on track to generate $ 200 million in revenue this year. Its revenue increased 150% in the second quarter. Management says the app is on track to more than double its revenue in 2021. This growth is only expected to continue until 2022, when management announces its intention to push Hinge internationally. Match Group demographic / niche dating apps like BLK, Chispa, and Upward continue to climb the top-grossing charts on the App Store. This group is only on track to generate $ 50 million in revenue this year compared to Match Group’s consolidated forecast of $ 3 billion, so it doesn’t matter much to the company right now. But in the long run, if they continue to grow, shareholders will certainly benefit.

Reasonable valuation

With a market cap of $ 40 billion, Match Group looks expensive compared to the $ 3 billion in revenue it is expected to generate this year. However, given the lightweight nature of dating apps, Match Group has very high profit margins even though it invests to grow its business. Management expects earnings before interest, taxes, depreciation and amortization (EBITDA) to be north of $ 1 billion this year, which is a good approximation of cash flow for this business. This gives the stock a forward price / EBITDA ratio of around 40, which is not much higher than the market average.

If Match Group can continue to grow its revenue at a rate of 20% over the next three to five years, that valuation will drop rapidly. In addition, investors should not forget the benefits that Match Group will obtain if Apple and GoogleApp Store charges are waived by law. In testimony to lawmakers, an executive from Match Group admitted that the company paid app stores about 20% of its annual revenue. If these developer app store fees go down, it will be a direct benefit to Match Group’s profit margins.

Match Group is in a fast growing industry and has impressive profit margins, and the stocks are trading at a reasonable valuation. This is a recipe for beating the potential market over the long term.