Trading: it’s time for investors to dump Match.com

The dating group is grappling with regulators and looks absurdly expensive.

Since the US stockmarket collapsed two months ago, it has enjoyed a massive rally, with the benchmark S&P 500 index gaining 30% from the trough. As a result, shares in many companies are now trading close to their pre-crisis highs. One of these is Match Group (Nasdaq: MTCH), which owns a portfolio of dating websites, notably Tinder and Match.com. The stock has rallied by 70% and is now nearly 25% above its level in early March and a mere 15% below January’s record peak. Yet the company has been beset by regulatory and structural difficulties.

Some of the regulatory ones are relatively minor. They include claims that it didn’t follow proper guidelines when sharing users’ data with third parties. However, others appear much more serious and could threaten Match’s “freemium” business model. For the past three years the US Federal Trade Commission (FTC) has been investigating allegations that Match.com has knowingly turned a blind eye to scammers contacting members of the free service, because it knows that they play a large role in getting irritated users to upgrade to the paid version. 

See you in court

After talks between the FTC and Match over a settlement broke down last summer, the FTC said that it would sue Match, while the Department of Justice has announced an investigation. These lawsuits risk drawing Match into a protracted legal battle that could prove expensive as well as damaging to Match’s reputation. Match.com may ultimately be forced to make changes to the way it operates, which could hamper its ability to convert users of its free services into paying customers.

Meanwhile there is evidence that the Match Group’s year-on-year revenue growth is starting to slow drastically, falling from around 18% between 2014 and 2019 to single digits in the last month. It is now increasingly depending on Tinder to fuel future expansion, with growth in the rest of the company broadly flat. 

Some of this may be temporary: lockdowns and social distancing mean people are unwilling to spend money on dating services when they can’t meet people in person. But there is also growing evidence that Match’s core North American market has reached saturation point, with even Tinder peaking. 

And there is another sign that Match’s prospects may be less rosy that they appear. Its major shareholder, holding company InterActiveCorp, announced a few months ago that it would cut its ties with Match. As a result the dating group’s debt will increase substantially. 

Given all this, its valuation of 33 times 2021 earnings and 6.7 times 2021 sales is excessive. Consider shorting it at the current price of $80, for £45 per $1. I suggest you cover your position if it goes above $102, well above its all-time high, giving you a potential downside of £990.

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