1 Beaten-Down Stock to Buy During the 2022 Bear Market

You couldn’t be faulted for swiping left on dating app company Match Group (MTCH -2.60%) in 2022. Down over 60% this year, the owner of Tinder, Hinge, and Match.com is one of the worst performers of the S&P 500 index, even lagging behind big losers like Netflix. With foreign exchange headwinds, disappointing guidance, and an unexpected managerial shake-up at Tinder, its most important app, investors have lost faith in Match Group stock this year.

But the long-term thesis with online dating is still intact, and this short-term pessimism is providing investors with a fantastic buying opportunity. Here’s why now is the time to get greedy and pick up some shares of Match Group. 

MTCH Total Return Level data by YCharts

Headwinds should abate soon

There are two major headwinds Match Group is facing in 2022: the devaluation of foreign currencies versus the U.S. dollar, and a lack of execution at Tinder. Both developments caused Match Group to revise its upcoming quarterly revenue guidance to be flat year over year, as opposed to the 15%-20% growth the company was expecting at the start of 2022.

Match Group is an international company that makes sales through in-app purchases in many countries outside of its home market, the U.S. In 2022, currencies like the euro and Japanese yen have gotten devalued significantly versus the U.S. dollar. When this happens, sales translate to become a lot weaker in U.S. dollars even if the products are priced the same in their respective domestic markets, hurting Match Group’s consolidated revenue growth.

For example, in Q2 of this year Match Group’s revenue would have grown 19% year over year without foreign currency headwinds as opposed to the 12% growth it actually posted. Foreign exchange rates are unpredictable, but it is unlikely these ahistorical moves versus the U.S. dollar will continue in the years ahead, which should help Match Group’s financials.

With Tinder, Match Group updated investors in Q2 that it has been disappointed with product execution at its flagship app in 2022. The team has subsequently been fired, and new management is taking the reins, along with a search for a new president/CEO of the division. With poor and delayed product releases at the app this year, Match Group now expects muted growth at Tinder this year. While this will hurt in 2022, it is likely the best long-term move, and if Tinder can get its new features like better subscription packages and a female-focused product by the end of this year, the app should resume its growth trajectory in 2023.

On top of these revenue headwinds, Match Group just hired a new CEO, Bernard Kim. Kim has experience within the mobile app space helping run Zynga, which I think will help him efficiently run Match Group’s dating apps. But there is always uncertainty when a new leader takes the helm of a public company. This is likely adding even more fear for investors at the moment, leading Match Group’s stock to decline.

Long-term tailwinds are still alive

Still interested in Match Group even with all these short-term headwinds? Good, because the long-term opportunity for mobile dating apps is phenomenal.

According to Match Group’s internal research, fewer than 50% of eligible singles on every major continent have tried an online dating product. In North America, industry penetration is 43%, and in Asia Pacific it is only 18%. In my view, this shows that online dating still has many years — if not decades — to grow around the world. With minimal competition outside of Bumble, Match Group has the best shot of capturing these users with apps like Tinder and Hinge once it regains its footing in 2023. 

For example, from 2017-2021, Match Group’s revenue grew at a compound annual rate of 22%. Some of this was due to great execution, but a lot of it was because the company was in the right business riding the right long-term tailwind. I expect this tailwind to continue this decade, helping Match Group grow its revenue at a double-digit rate from 2023 onwards.

If you squint, the stock is cheap

As of this writing, Match Group stock trades at a market cap of approximately $15 billion. While its price-to-earnings (P/E) ratio looks expensive at 162, this is actually masking the true earnings power of the dating app business because of one-time write-offs and non-cash charges.

From 2017-2021, Match Group’s adjusted operating margin was 35% or higher. Historically, the company has converted a little bit less of its adjusted earnings into free cash flow. Free cash flow is the true measure of profitability for a business, as it is the actual cash being generated for shareholders. Conservatively, let’s assume Match Group generates an average free cash flow margin of 30% in the future.

With $3.2 billion in trailing-12-month revenue, this would equate to $960 million in annual free cash flow or a price-to-free cash flow (P/FCF) ratio of 15.6. This is below the market average, which looks cheap considering the industry growth of online dating. If Match Group can grow its revenue by 15% a year for the next three years, it will be doing $4.86 billion in annual sales. At a 30% margin, this would equate to $1.46 billion in free cash flow and a P/FCF ratio of 10.

Even though there are major short-term headwinds, Match Group is a high-margin, cash-generating business riding a secular tailwind. At current prices, that makes the stock a buy. 

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