Another teaser pitch from the Motley Fool Canada for us to peruse this morning… they’re pitching another social media company that is apparently taking over the world, in the wake of TikTok’s dramatic surge in 2020, and, like TikTok, it’s coming out of Asia but spreading to new markets.

The ad is for a big mainstream newsletter, Stock Advisor Canada (currently C$99/yr), so it’s not likely to be some microcap you’ve never heard of — or a stock that would be hard for North American investors to buy… but still, we’re intrigued. What’s the stock?

Let’s check out the ad, sift out the clues, and get a name for you… here’s how it got my attention:

“At this very second, a groundbreaking social media app is taking over the phones of Gen Z and Millennial youngsters across Asia.

“It’s already been downloaded over half a billion times, yet few North Americans have ever even heard of it!

“But that could change very soon…

“Because this app belongs to an emerging social media category that a NASDAQ 100 CEO says will be twice as big as the entire online dating sector.”

OK, so now we’re interested — what’s this “emerging social media category” and what’s the stock?

Well, the “groundbreaking social media app” isn’t a stock in itself, they’ve been bought by a larger company… so that’s the tease, that we should buy this secret company that will benefit from this hot new social media platform. So what is it?

Here are our clues…

“… a publicly-traded tech company in the US has bought this massively popular Korean-built app for $1.7 billion.

“That’s nearly twice what Facebook spent on their Instagram acquisition in 2012!

“… we believe this rapidly growing app could soon dominate North America, skyrocketing its new parent company’s stock price to record-breaking heights!”

And there’s some additional comparison made to TikTok…

“… it’s in a remarkably similar position to TikTok in late-2017…right as TikTok started boosting its parent company’s valuation to $450 billion!

“You see…TikTok also had hundreds of millions of users in Asia before its mass exposure to the North American market.

“Like this groundbreaking Korean-developed app, TikTok’s mass-appeal was already a proven fact.”

So what does this new social media app do? What’s new here? This is what the ad says:

“Video chats with instant voice translations…allowing people to speak face to face even if they don’t share a common language!

“Coming soon: Incorporation of Korean-developed ‘human-AI’ technology, which will allow users to have text and video conversations with AI-rendered versions of historical figures like Albert Einstein!

“A proprietary content filtration system that automatically tracks and removes unwanted content in 0.004 seconds!”

OK… so what’s the stock?

Well, the “social media app” being teased is Hyperconnect, and it was acquired earlier this year by the US-based matchmaking giant Match Group (MTCH), which is best known as the owner of Tinder and Match.com but owns dozens of social brands, mostly in the dating space.

Here’s how they describe Hyperconnect in their second quarter shareholder letter:

“Near the end of the second quarter, we closed the acquisition of Hyperconnect, which brings two new Emerging Brands into our portfolio — Azar® and Hakuna™. Combined, these two brands have over 570K Payers with RPP approaching $35 and approximately 90% of their revenue coming from à la carte. These video-based brands expand our capabilities to enable people to meet and create social connections online that remain online, and broaden our products for social discovery in addition to dating….

“We have been working closely with the Hyperconnect team since closing the acquisition only six weeks ago, and our multi-pronged thesis for the acquisition remains very much intact. They bring us significant capability in Asian markets, with Gen Z, with in-app currency, and with video, AR and AI technology. We believe we can help turbocharge their apps given our expertise in performance marketing and via our teams on the ground in critical markets including Japan, the U.S. and Western Europe.”

And yes, that “social discovery” aspect is what the “Nasdaq 100 CEO” said would be twice the size of dating, per the hints in the tease — though, to be fair, the Nasdaq 100 company whose CEO happened to say that is, coincidentally, Match Group, those quotes from CEO Shar Dubey came in the press releases following their Hyperconnect announcement back in February. This is Match’s biggest acquisition to date, and they do see it growing into a meaningful part of the business.

So while they can probably build on Hyperconnect’s Azar and Hakuna apps (Azar matches people to one-on-one video chats, Hakuna does live video broadcasting, with both optimized for real-time translation and good performance in markets where phones and/or networks are not as advanced as they are in South Korea or the US), which are already emerging as popular in many nations, they seem most excited not about the potential for Azar to become a TikTok-size phenomenon, but what the technology might bring to their other global platforms… this is also from the letter:

“What excites us most about having Hyperconnect in the Match Group family are the opportunities for shared synergies between Hyperconnect’s technology and Match Group’s other brands. We are refining plans to selectively implement 1:1 audio and video chat, group live video, and live streaming from Hyperconnect at several of our brands over the next 12-24 months. Our expectation is that at least two of our brands will have integrations with Hyperconnect technology by the end of 2021.”

With the scale available at Match, that might be pretty interesting — the company will probably have $3 billion in revenue this year, so $130 million from Hyperconnect is not going to drive the bus anytime soon (Match expects to operate Hyperconnect at roughly break-even for now), but if that realtime video chat platform, which in current use includes an AI-fueled match generator, can boost the use of Tinder or any of the other Match platforms, or lead to becoming another meaningful non-dating social platform for them, that could easily be worth the $1.7 billion they spent. It won’t be easy, this is an extremely competitive space globally and in most countries you’ll find dozens of “social discovery” video chat apps vying for your attention, but Hyperconnect’s Azar, in particular, has established at least some presence in some big markets (they’re a top-20 grossing app in India, for example). When you have access to huge numbers of people, as Match does (their current “total paying users” number is about 15 million globally, though Tinder by itself probably has close to 60 million free users at any given time), you can really supercharge a new technology.

So is that enough to get us to buy Match? It’s a company I’ve long admired, but never owned, and the Motley Fool Rule Breakers folks in the US have been pitching the stock as a “recent IPO” for four or five years now, leading up to the stock finally being completely separated from former parent IAC/Interactive Corp (IAC) last year. Last time I looked at the stock, about a year and a half ago, I decided it was pretty close to the maximum price I could imagine paying (around $70 at the time), but I opted not to buy. This is what I said at the time, as we were just bouncing back from the first COVID collapse in April of last year:

“I expect Match to own the dominant dating platforms for a long time, it’s hard to imagine anyone really taking market share and they’ve continued to buy up smaller startups, so it’s possible that this is a bargain buying opportunity… but I haven’t ever owned the shares or tried their services, so you can take that sentiment with a grain of salt.

“At $67 or so, they’re trading at about 32X trailing earnings, which is clearly a steep valuation for a company whose earnings will probably be pretty close to flat, at best, in 2020… but analysts do see earnings growing pretty rapidly again starting next year, with the 2022 forecasts implying an earnings growth rate of about 15% a year from 2019-2022, so somewhere in the $65-70 neighborhood is probably roughly the most I could stomach spending on an established growth stock like Match (that would be a Price/Earnings/Growth ratio of about 2). It’s not an easy buy, but you can certainly make the case given their market-leading position and the high margins enjoyed by a software company with a strong network effect.”

So… I was a dummy, in retrospect I should have been buying MTCH as it came out of the COVID collapse, but that’s hindsight… and, frankly, it almost didn’t matter what you bought last Spring as long as you were buying something. MTCH has beaten the market, up 130% or so since then, but most of us who invest in tech or growth stocks at all had plenty of stocks that did similarly or better over the past year or so… and even just buying the Nasdaq or the S&P 500 would have made you pretty happy (up 87% and 67%, respectively).

Today? Things have settled down quite a bit, and MTCH has been flat for the last 10 months or so as investors try to figure out what the future looks like and digest that big move. What does the valuation look like now?

Well, the second quarter report in early August was a disappointment for shareholders, thanks to worries about the slow reopening in much of the world, the tepid results from Tinder, and the stickiness of COVID-19 as variants spread — they came in with earnings slightly below analyst expectations, with roughly 27% revenue growth and 15% EBITDA growth as they boosted their spending this year, especially on improving their video offerings… though they did raise their revenue guidance for the third quarter and the full year to be a little bit above analyst estimates, which is a positive. The sum-up was, “We expect Tinder to grow revenue close to 20% year-over-year, the Established Brands to grow in the single-digits year-over-year, and the Emerging Brands, which now include Hyperconnect’s products, to grow well over 100% year-over-year,” and that helped drive the stock down about 20% into the dog days of mid-August, though they’ve bounced back slightly.

What’s the outlook now? The estimate now is that 2021 earnings will be roughly flat with 2020, with about $2.42 in EPS for this year, but analysts do also see some meaningful growth picking up from here, with current forecasts of $3.02 in 2022 and $4.32 in 2023. Which means you can’t really buy just on the current numbers, it’s not an easy “growth at a reasonable price” story — if the analysts are right, that would mean we’re currently in a period with an expected compound annual growth rate for earnings of about 20%, and my old back-of-the-envelope calculation is typically that I’m comfortable paying a PE multiple of twice the growth rate for a great company, which would be 40X earnings. That’s about $96 now for trailing earnings, and $120 for forward earnings, and the stock is at $140, so that doesn’t make the cut as an easy buy.

But should it make the cut as a somewhat more difficult buy to justify?

Maybe.

Monopolies and dominant social platforms are absurdly valuable, partly because it’s hard for us to conceptualize how much more valuable they might be in the future as more people participate, and Match has pretty much steamrolled every other business that has tried to build a dating platform over the years, including some huge competitors like Facebook. The powerful force driving anything in social media or online marketplaces (and really, dating is the ultimate marketplace, crass though that sounds) is the network effect — more people draw more people. It is really, really hard to break that cycle and get people to try something new — sometimes it happens, with viral marketing or a genuinely better or distinct product offering or a shock to the system (like COVID), but most of the time what draws people to a social platform is knowing that there are more people there, so they’re more likely to either find people they know or meet new people that match their interests. What draws people to a dating platform is, likewise, knowing that there are more people so there will be more potential matches, either in their neighborhood or their city or their affinity group or their age group or whatever. That cycle is powerful, and Match has continued to invest in their platform by buying more brands, buying more technologies and platforms (including Hyperconnect, and before that the relationship-focused Hinge a couple years ago), and making it ever more difficult for competitors to take share from them. Social networks, to some degree, are natural “winner take (almost) all” businesses.

So yes, I can get talked into buying an initial stake in Match here, and I decided to do so, inspired by the potential for growth to resume post-COVID and the fact that the stock is still down a good 15% or so from their earnings report. It’s still an expensive stock, I don’t get to have the smartypants feeling of buying the bottom here, which is a bummer, and Match is not likely to turn Hyperconnect into the “next TikTok” in the next year and explode higher, so I wouldn’t go crazy (that’s not impossible, of course, but the odds are long — there are hundreds of other video chat and video streaming apps), but I’m willing to buy a small stake here. I hope that when the market does collapse 25% at some point, and maybe Match falls 40%, I’ll be awake and alert enough to recognize the opportunity and buy more aggressively… or, of course, that the business will recover before the stock and become even more appealing in the months to come.

And, I might add, Match is also a very big potential beneficiary if the apps get some real leverage over the app stores — Match says it pays almost $500 million annually to the app stores, thanks to those big commissions that Apple and Google take from payment processing on their paid services. Those fees are under huge pressure from regulators and in the courts, and for a company that had pre-tax income in its best year of not that much more than $500 million a further reduction in that cost line would obviously be a big deal. Especially if Match can continue to turn many more of its free users into “payers” over time, something the Hyperconnect apps have also shown they’re good at doing recently as they sell stickers and some preferential access (letting you more precisely filter your feed, for example) to paying users.

That alone might be reason to consider Match here, though there’s no guarantee that Epic Games and Match and Spotify and the other companies who are going after Apple and Google in court will win. The app stores generally impose a 30% commission on anything charged through an app, and block you from advertising off-app purchases in the app or redirecting app users to a different payment platform, so Tinder’s $9.99/month for a premium membership results in only $7 of revenue to Match, which means cutting that fee in half to 15%, just as an example, could instantly provide 20% revenue growth for a big chunk of Match’s business. I don’t know what the current situation is with the app store fee fight globally, and it will probably take time to shake out, but I think it’s very likely that app store commissions will fall over time.

The risks? The big risk for a dating app, of course, is that most people don’t use them in perpetuity — you date for a few years, perhaps, then most people hope to match up permanently with someone and no longer use dating apps, so you have to churn your users. That’s been true forever, though, and has clearly not hurt because new people enter adulthood or become single every day, and it seems to me that the growing acceptance and global spread of online dating over the past 20 years has far outpaced the churn from match “successes.”

The risks I worry about are primarily that Tinder, which is by far Match’s biggest business, doesn’t see its growth pick back up as the world comes out of the pandemic (particularly if the pandemic’s next wave is worse than expected), or that they will face real competition at some point — the network effect is powerful, but it is not indomitable, even for a $40 billion company like Match. Absent that, they have a hugely valuable collection of franchises and an almost unbelievably valuable pool of people to market to… from connection-seekers on Tinder to relationship-seekers on Hinge and, now, the less dating-focused products from Hyperconnect that might find accelerating global appeal with the strength of Match’s backing. And, of course, they’re nicely profitable, and can afford to keep innovating and acquiring competitors. I’d say it’s not trading at a great price right now, but it’s a great business at a price that’s almost reasonable, and those are usually worth owning… and while I can’t see the future, I do think Match is probably being underestimated as the world gets back to real life. We don’t need Azar or Hakuna to become TikTok-level popular for Match to work, though that would, of course, be a nice bonus.

That’s what I think, anyway, and what I’m doing with my money — with your money, of course, it’s your call. Think Match is attractive after being relatively disappointing this year? Still too expensive? Think other services will chip away at them over time? Let us know with a comment below. Thanks for reading!

Disclosure: Of the stocks mentioned above, I own shares of Match Group and Google parent Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.