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?
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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 prob