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Match.Com Shares Pummeled, but Can Facebook Really Take Out the Dating Giant?

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Shares of Match Group (MTCH - Free Report) sold off nearly 25% in intraday trading on news that Facebook (FB - Free Report) has plans to add dating functionality to its offerings.  Speaking at Facebook’s annual F8 Developers Conference, CEO Mark Zuckerberg unveiled an opt-in feature for Facebook users that will pair them up with potential dating partners based on existing profile information and also allow them to build a separate dating profile that will not be visible to the user’s other friends.

Shares of Match Group parent company Interactive Corp (IAC - Free Report) were also punished, falling 18%.

On the surface, getting into dating apps seems like a no-brainer for Facebook, which already has 2.2 million users, 1.4 million of whom are characterized as “Active Daily Users”, and 29% are between the ages of 25 and 34.  It’s not too much of a stretch to imagine that many of them would at least try the new dating functionality, especially if it’s easy to set up and free.

But Can Facebook really put a serious dent in the established leader in online dating services?  Let’s take a closer look at how Match Group’s businesses operate.

Pioneer and Leader

Founded in 1995, Match Group and its flagship product are far and away the biggest household names in online dating.  Growing both organically and through acquisitions, the group now encompasses popular sites and apps across a broad spectrum of potential daters., Tinder, PlentyOfFish, OkCupid and OurTime (aimed at daters aged 50+) dominate the landscape across a wide swath of demographics and dating expectations.  Several other smaller Match Group brands target specific geographical areas (Europe, Asia), plus racial, ethnic and religious groups and even political affiliation.

Match group has 7 million subscribers worldwide and 3 million of them use Tinder - the most profitable segment of Match Groups business for advertising.  (In fact, as of Q4 2017, Tinder was the highest grossing app in Apple’s App Store, edging out Pandora, Netflix and Candy Crush.) With a combination of free features - which include advertising - and paid subscription-based premium services and options, Match Group took in $1.3B in revenue in 2017 and earned $469M or $0.76/share.

Profit expectations are even higher for 2018 with the Zacks Consensus Earnings Estimate currently at $1.25/share, 65% higher than last year and up 12% from the estimate of $1.11/share just 90 days ago. Match Group is a Zacks Rank #1 (Strong Buy).

Match Group shares have performed extraordinarily well in 2018, up 50% YTD before today’s steep sell-off, versus about a 1% gain for the S&P 500 and a loss of 7% for the Internet Services Sector.

Facebook Threat

Because of its sheer size, anything Facebook does is rightly viewed as a potential threat to anyone currently occupying the space they’re about to enter.  Facebook’s 2.2 billion user count dwarfs Match Group’s 7 million, suggesting that if Facebook dating gains traction, Match could see widespread defections and a resulting hit to earnings.

Because of its deep pockets, Facebook can afford to spend heavily on new features without needing them to be immediately profitable – a luxury not afforded to companies with smaller economies of scale
Facebook a few hurdles in the dating business, however.

For one, their widely publicized problems with privacy and data collection will likely make many users reluctant to turn over even more personal information than they already have.  Also, although details on the dating functionality are scarce, Zuckerberg stated that the algorithm would be focused on “building real, long-term relationships, not just hook-ups.”  This suggests a one-size-fits-all approach to making dating recommendations, in stark contrast with Match Group’s much more focused offerings.

In general, today’s knee-jerk reaction in Match Group stock seems overdone.  It’s been a jittery market lately and investors who were sitting on a 50% winner YTD were all too eager to run for the exits when Facebook announced a potential threat.  Even if Facebook is successful in building popular dating functionality, it will likely take a while to gain enough users to significantly threaten Match Group.

Days like today where a stock gets beaten down 25% on speculation about competition that has yet to actually materialize tend to be opportunities for bold investors to scoop up solid earning companies at a big discount.

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