Another $MTCH Activist Campaign, My $0.02

Starboard Value takes 6.5% stake in Match Group ($MTCH), My Thoughts as a former $MTCH Bag holder

Earlier this summer I applied to Value Investors Club with this pitch but got rejected unfortunately, I still keep tabs on $MTCH and thought this would be an interesting post so let’s dive in.

Around the beginning of the year, Elliot Management took an activist stake in Match and later Anson Funds also took an activist stake. I saw it as an attractive play as I wondered what kind of magic these funds, Elliot in particular, would make.

After doing some fundamental research, I decided that Match needed to do three things in order to send their stock back up;

• Innovate with Hinge, their new cash cow

• Cut back on SBC and trim fat on their executive team

• Focus on optimizing monetization channels and growing monthly active users (MAUs) with Tinder, as it has pretty much been the same for the past 2-3 years.

After the first quarter earnings, I pretty much lost all hope in Match’s executive team to change directions, even with two members appointed from the Elliot Management activist campaign. Here are some notes I took;

Notes From q1 Earnings

Repurchased $198 Million of stock/ 6 million shares deployed approximately 75% of FCF for this ( Still has $800 million left of buybacks)

Hinge Revenue is up 50%

Payers declined 6%, had 15.8 million in 2023 q1, and now have 14.9 million

Operating Income down 7% vs 2023 q1 to 185 million, impacted by an increase in SBC because of rapid hiring activity and depreciation of capitalized software

Tinder “continues to face headwinds”???

Tinder is in the midst of its four-stage strategy, redefine dating for the next generation, win with women, improve monetization optimization and localization, build a widely loved brand

Cutting risk associated with using Tinder by adding the “Share My Date” feature

Plans to deploy new technology into Tinder such as AI (I don’t know how much this will really help, it could just be a buzzword) to improve recommendations

Still is in the midst of figuring out monetization channels for Tinder

Tinder has a “it starts with a swipe” campaign coming up this summer

Since then I’ve had a pretty negative view on Match Group as a whole and while I’m just a broke college kid whose portfolio is made up of longs, mentally I am short. And this is why.

I believe their lack of innovation within Tinder, will continue to drop their monthly average users and this will also show in the cannibalization of Hinge to Tinder. I also believe that their management team has no direction even when teamed up with activist fund, Elliot. Match's stock-based compensation has been rising to levels where you would think the company is beating the market and its management is getting rewarded from it, but in reality, it's actually the opposite. Match is down 5.4% YTD and is hiring the most expensive talent which is the opposite of what I think they should be doing which is cutting fat on their team. Management also has trimmed margins in their operating income by major levels by allocating funds into places where it has no effect on their top or bottom line. Lastly, I see the e-dating market as a market with very low barrier to entry since a simple trend on a social media platform could stray users away from legacy apps such as Tinder and onto news apps. The e-dating market is built on the foundation of "people want to be where other people are" and Match group's lack of innovation and price hikes, combined with their low-value prop has strayed users away from apps that are not under their umbrella.

Match Group provides dating products worldwide. Their portfolio of brands includes Tinder, Match, The League, Azar, Meetic, OkCupid, Hinge, Pairs, Plenty Of Fish, and Hakuna, as well as various other brands. Their services are available in over 40 languages to users all over the world. They make money mainly off of subscriptions and their main source of revenue comes from Tinder. Match has not prioritized making the best experience for users on Tinder in which the reaction has been seeing cannibal growth in Hinge as Hinge is growing revenue 50% YoY. Hinge is also seeing stabilized growth in their monthly active user's but on the flipside, Tinder is seeing declines YoY in their MAUs. Tinder is only seeing revenue growth due to their increasing prices which has also caused an increased in revenue per payer (RPP) but I don't think this will last for long. Management blames "weaker consumer discretionary spending" as a cause for this but I think they have realized that users are flocking over to Hinge and competitor Bumble. Bumble has seen total payers increase YoY and Match has seen the opposite. Management's strategy to compensate for this was to increase prices which I think was the wrong move to make as I see the problem being users overall just losing interest in their apps, especially Tinder. Match's strategy with Tinder as quoted from their most recent shareholder letter states, ": 1) redefine dating for the next generation; 2) win with women; 3) improve monetization optimization and localization; and 4) build a widely loved brand." I think they have their priorities all wrong with this strategy and should be focusing solely on improving user experience.

Match's R&D jumped from $97.6 million to $115.7 million over the past quarter, this is due to them trying to optimize their algorithms with artificial intelligence, which I don't see happening anytime soon as there hasn't been any raised guidance on their historically low capital expenditures. Match is also spending this R&D to gain a deeper understanding of Tinders target audience. I think Match is focusing too much on their R&D spend attempting to optimize their algorithms, instead of focusing on innovating their product which has pretty much been the same over the past few years. Customer reviews state how the product has pretty much hasn't changed and some customers have heavy complaints about the number of sexbots that raid Tinder and are making the app "trash".

Tinder has increased prices over the past year with little to no additional features added. Customers have major complaints about how they've moved some of the most basic features to paid features. These Tinder price hikes are not only annoying to customers, but they also drive them to other apps in hopes of getting more bang for their buck. While Match has taken some initiative by offering weekly pay packages which have improved their conversion, I don't think this will offset the steady decline in payers since consumers and stats show that Hinge & Bumble are currently better products (Good for Match that Hinge is still under their umbrella).

Match's management is guiding revenue of $850-860 million next quarter which is the exact number they guided the previous quarter and it's pretty reasonable since they have a plan with Tinder and expect to see results in the back half of 2024 with users and payers on the incline again. Seeing this, you would think that their revenue would then shoot up but management doesn't seem confident in their plan as estimates had guidance at $882 million for q2. If Match continues with this trend they will put up only around $3.4 billion in revenue compared to $3.364 billion last year, which only ends up being around a 2% growth rate YoY. My problem with this is that management doesn't seem confident that their growth strategy with Tinder will play out like they are expecting it too. Management states that the product experience needs to improve before seeing growth but they've taken more steps into buying back shares and compensating management than actually improving this user experience.

Operating income is down 7% YoY, due to selling and marketing expenses which aren't working to the point where it should cause a 7% decrease, management also states increased stock-based compensation as a reason for this.

SBC is taking a huge part of the buyback program as quarterly SBC was up about $64 million, Match bought back almost $200 million in stock this past quarter, and a third of that was used to compensate their employees, I think next earnings print if investors don't see a trim down in sbc (which I think is very unlikely due to the caliber of talent that they are hiring to turn things around) the stock will continue to drawdown.

Match's opex is growing pretty much in line with revenue. Match is burning cash on line items that aren't positively affecting their top or bottom line, I think the turnaround here is the cash needs to be spent on acquiring other apps in the space. My reasoning for this is that the e-dating market has a very low barrier to entry and even though management stated they don't see anticipate any near-term acquisitions, I think this would benefit them a lot in the spot they are in. Match possesses little to no economic moat in my opinion and it's easy for the new trendy dating app to come steal users from apps under their umbrella, Hinge is a good example of this but is under their umbrella. Dating app moats overall are very weak, they lose their customer if their app works, and most dating apps under Match's umbrella don't have any other value except possessing users in a different country. Dating apps face the problem of people getting bored when others aren't joining the app and we've seen an increase in Hinge downloads which points to where the people are, and a decrease in Tinder downloads, which points to where the people aren't. Bumble fits in the former category. This shows very little barrier to entry in the e-dating market.

Where Match group is currently trading assumes that their Tinder strategy will eventually go to plan, rides the coattails of Elliot shifting management direction into being favorable for shareholders, and that Match figures out how to optimize the user experience across their apps which will lead to increased MAU's. The stock is down YTD and I believe has more room to drop following q2 and q3 earnings when investors realize that Tinder has hit its ceiling and is being partially cannibalized by Hinge, financials are not in line with future performance (SBC, R&D, Opex), and the low economic moat of Match combined with the low barrier to entry of the e-dating market make it an unattractive stock to hold in my opinion (not advice of course).

Now I’ll break down some parts of Starboards letter to the Match Board, I’ll link it below though if you want to read it yourself.

Starboard starts off their letter by stating how they own approximately 6.5% of shares and how their firm seeks to invest in undervalued companies blah blah blah, the usual activist jargon.

They then go into Tinder, “We believe Tinder’s issues are driven, in large part, by a lack of innovation at the product level after years of viral growth. We believe these and other issues at Tinder are addressable and resolving them will drive improved results.” I also stated this in my pitch as Match’s executive team has failed to innovate with Tinder and has gotten complacent with their spot at the top.

“We believe BK’s experience in the gaming industry should provide transferable insights and are hopeful that the nearly 18 months he spent as Interim CEO of Tinder.” When I was listening to Squawk on the Street earlier, Jim Cramer made a great comment on this line in Starboards letter by saying, “Tinder, Hinge, uh- Draft Kings? … that was a stretch.” Cramer also stated, “How do you own the segment and not make more money?” This is completely true, if this turnaround doesn’t work Match will need to be sold off and this is a big part of Starboard's letter as they want Match private if performance fails to improve.

Capital allocation was a big focus of mine when looking at Match and I’m glad I’m not the only one who thought that, Starboard states, “Furthermore, Match has opportunities to reduce expenses in multiple cost centers. We believe opportunities exist to rationalize costs in the Company’s General & Administrative function, in addition to other areas.”

I think there has always been an opportunity to turn Match around but as Elliot has shown, it’s not an easy task to do. Starboard has a big emphasis on Match being taken private if the turnaround doesn’t work so it’ll be fun to see how things play out.