1.How are the firm’s operational and key risk factors captured in their financial statements? Income statement will reveal obvious ones, but remember to look at places that are less obvious such as the footnotes
2.Income Statement Analysis
Trends, changes:
Is there potential for misstated revenues?
Is there potential for misstated expenses?
Analysis of revenue recognition, potential for returns, recalls
Analysis of expenses, % of sales, depreciation/amortization/deferral assumptions
Analysis of “non-recurring” and cut-from-pro-forma expenses
3.Balance Sheet Analysis
This neglected financial statement doesn’t get the press as much.
Are there any overstated assets?
Are there any understated liabilities?
Receivables (relative to sales, allowance, trends)
Inventory (relative to sales, gross margins, methods, trends)
Long term assets
Financial obligations
4.Proposed Adjustments if any (show in an exhibit the calculations for the adjustments.)
Operating
Assumptions
Match
Valuation
Model
Operating Assumptions
20
2020
2
8
7
–
14.6%
.1%
15.1%
Revenue
.2%
.5%
.8%
.3%
.4%
3
4
0
.5%
.6%
.2%
44.8% 47.5%
.8%
.8%
1
4
1
,243
–
15.1%
.5%
13.5% 13.5% 13.5% 13.5% 13.5%
13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
12.5% 12.5% 12.5% 12.5% 12.5%
2
3
35.2%
28.0% 28.0%
25.0% 25.0%
26.5%
23.5% 23.5%
.6%
9
20.9%
0.21
0.22 0.22 0.22
0.23 0.23 0.23
)
1.8%
%
1.4% 1.4% 1.3%
0.21 0.19
0.20 0.20 0.20 0.20 0.20
9.7%
2.1%
0.8% 0.4%
1.5% 1.4% (0.5%) 0.8% 0.5%
6.6%
0.0% 0.0%
3.0% 3.0% 3.0%
3.0% 2.1% 1.7% 1.4% 1.2% 1.0% 0.9% 0.7%
51 49 53 43 43 43 44 46 47 48
6.6%
-% 2.0% 3.0% 3.0% 3.0%
1
7
30.0%
20.9% 21.1% 21.1%
penses
1,118
1,730 2,051
3,075 3,716 4,502 5,452
Base (17.5%)
(24.3%) (24.3%)
)
(25.8%) (25.8%)
Base
(34.8%)
)
)
(36.8%)
)
-% -% -% -% -% -% -%
(7.0%)
(7.6%)
(7.5%) (7.5%) (7.5%) (7.5%) (7.5%)
-% -% -% -% -% -% -% -% -% -%
DA
.1%
.3%)
)
5.7% 8.8% 5.7% 5.7% 7.4%
8.6%
14.9%
11.8% 11.8%
(3.8%)
(3.3%) (3.3%) (3.3%)
)
(26.0%)
(26.3%)
.7
.6
.4
.8
and
Assumptions
as % of Revenues
5.6% 4.6% 3.4% 5.3% 5.4% 5.4% 5.5% 5.5% 5.5% 5.5%
(45.0%) (45.0%) (45.0%) (45.0%) (45.0%)
(3.0%) (3.0%) (3.0%) (3.0%) (3.0%)
135
62
109 135 167 203 247
)
(92) (111)
(7.0%)
(5.7%) (5.7%) (5.7%) (5.7%) (5.7%) (5.7%)
52.2%
1
-%
16.5%
1,176 1,253 1,516
1,932 2,394 2,745
4,015
(0.1%)
-0.3%
-0.3% -0.3% -0.4%
26.1%
3.0% 3.7% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Financials
Match Valuation Model | |||||||||||||||||||||||||||||||||||||||
Historical | |||||||||||||||||||||||||||||||||||||||
($ in millions of U.S. dollars except per share amounts) | 2019 | 2024 | 2025 | ||||||||||||||||||||||||||||||||||||
1,281 | 2,464 | 3,032 | 6,549 | ||||||||||||||||||||||||||||||||||||
Total GAAP accounting revenues | |||||||||||||||||||||||||||||||||||||||
(196) | ( | 279 | (410) | (527) | (588) | (747) | (910) | (1,084) | (1,324) | (1, | 602 | ||||||||||||||||||||||||||||
Gross profit | 922 | 1,051 | 1, | 320 | 1,524 | 1,919 | 2, | 328 | 2,806 | 3, | 418 | 4,128 | 4,995 | ||||||||||||||||||||||||||
82.5% | 76.3% | 74.3% | 76.5% | 75.7% | 75.5% | 7 | 5.9% | ||||||||||||||||||||||||||||||||
(493) | ( | 550 | (600) | (682) | (913) | (1,0 | 70 | (1,294) | (1,592) | (1,908) | (2,313) | ||||||||||||||||||||||||||||
(2) | (13) | (1) | |||||||||||||||||||||||||||||||||||||
(101) | (132) | (152) | (189) | (231) | (278) | (339) | (495) | ||||||||||||||||||||||||||||||||
EBITDA | 349 | 387 | 587 | 690 | 816 | 1,027 | 1,233 | 1, | 488 | 1,811 | 2, | 187 | |||||||||||||||||||||||||||
32.6% | 33.4% | 33.2% | 33.0% | 33.1% | |||||||||||||||||||||||||||||||||||
(28) | (33) | (32) | (49) | (61) | (91) | ||||||||||||||||||||||||||||||||||
Amort. of Goodwill and Intangibles | (17) | (9) | (4) | (5) | (6) | ||||||||||||||||||||||||||||||||||
304 | 353 | 649 | 763 | 961 | 1,153 | 1,392 | 1, | 695 | 2,047 | ||||||||||||||||||||||||||||||
27.2% | 32.0% | 31.6% | 30.4% | 31.3% | 31.0% | 30.9% | 31.1% | ||||||||||||||||||||||||||||||||
16% | 57% | 17% | 18% | 26% | 20% | 21% | 22% | ||||||||||||||||||||||||||||||||
Interest income | |||||||||||||||||||||||||||||||||||||||
Currency Exchange Gains (Loss) | (10) | ||||||||||||||||||||||||||||||||||||||
Other Non-Operating Inc. (Exp.) | |||||||||||||||||||||||||||||||||||||||
Earnings before taxes | 241 | 252 | 555 | 653 | 824 | 996 | 1,203 | 1,771 | |||||||||||||||||||||||||||||||
Tax expense | (63) | 104 | (15) | (20) | ( | 131 | (165) | (199) | (241) | (293) | (354) | ||||||||||||||||||||||||||||
Net income | 178 | 356 | 473 | 534 | 522 | 659 | 797 | 963 | 1,172 | 1,417 | |||||||||||||||||||||||||||||
Earnings of Discontinued Ops. | (0) | ||||||||||||||||||||||||||||||||||||||
Minority interest | |||||||||||||||||||||||||||||||||||||||
Net income attributable to company | 171 | 350 | 478 | 535 | |||||||||||||||||||||||||||||||||||
Basic shares outstanding | 264 | 277 | 280 | ||||||||||||||||||||||||||||||||||||
Diluted shares outstanding | 270 | 296 | 297 | ||||||||||||||||||||||||||||||||||||
Diluted earnings (loss) per share | 0.64 | 1.18 | 1.61 | 1.81 | 1.77 | 2.23 | 2.70 | 3.26 | 3.97 | 4.80 | |||||||||||||||||||||||||||||
Historical and Projected Cash Flow Statement | |||||||||||||||||||||||||||||||||||||||
Funds From Operating Activities | |||||||||||||||||||||||||||||||||||||||
Depreciation And Amortization | 116 | ||||||||||||||||||||||||||||||||||||||
Net Cash From Discontinued Ops. | |||||||||||||||||||||||||||||||||||||||
Other Operating Activities | (85) | (24) | |||||||||||||||||||||||||||||||||||||
Change in Acc. Receivable | (11) | (52) | (18) | (69) | (26) | (60) | (86) | ( | 123 | ||||||||||||||||||||||||||||||
Change in Acc. Payable | |||||||||||||||||||||||||||||||||||||||
Change in Unearned Rev. | 107 | 136 | |||||||||||||||||||||||||||||||||||||
Change in Inc. Taxes | |||||||||||||||||||||||||||||||||||||||
Change in Other Net Operating | Assets | ||||||||||||||||||||||||||||||||||||||
Cash flow from operating activities | 315 | 658 | 569 | 799 | 959 | 1,114 | 1,384 | 1,659 | |||||||||||||||||||||||||||||||
Funds From Investing Activities | |||||||||||||||||||||||||||||||||||||||
Capital Expenditure | |||||||||||||||||||||||||||||||||||||||
Cash Acquisitions | |||||||||||||||||||||||||||||||||||||||
Divestitures | |||||||||||||||||||||||||||||||||||||||
Invest. in Marketable & Equity Securt. | |||||||||||||||||||||||||||||||||||||||
Net (Inc.) Dec. in Loans Originated/Sold | |||||||||||||||||||||||||||||||||||||||
Other Investing Activities | |||||||||||||||||||||||||||||||||||||||
Cash flow from investing activities | (38) | (42) | |||||||||||||||||||||||||||||||||||||
Funds From Financing Activities | |||||||||||||||||||||||||||||||||||||||
Short Term Debt Issued | |||||||||||||||||||||||||||||||||||||||
Long-Term Debt | |||||||||||||||||||||||||||||||||||||||
Total Debt Issued | |||||||||||||||||||||||||||||||||||||||
Short Term Debt Repaid | |||||||||||||||||||||||||||||||||||||||
Long-Term Debt Repaid | (450) | (445) | (300) | (308) | (251) | (415) | (453) | (515) | (662) | ||||||||||||||||||||||||||||||
Total Debt Repaid | |||||||||||||||||||||||||||||||||||||||
Issuance of | Common Stock | ||||||||||||||||||||||||||||||||||||||
Repurchase of Common Stock | (30) | ( | 254 | (341) | (420) | ||||||||||||||||||||||||||||||||||
Common Dividends Paid | |||||||||||||||||||||||||||||||||||||||
Special Dividend Paid | (556) | ||||||||||||||||||||||||||||||||||||||
Other Financing Activities | (21) | (309) | (12) | (7) | |||||||||||||||||||||||||||||||||||
Cash flow from financing activities | (424) | (650) | (337) | 329 | 461 | 351 | 721 | 803 | |||||||||||||||||||||||||||||||
Effect of exchange rate on cash | |||||||||||||||||||||||||||||||||||||||
Beginning cash balance | 273 | 466 | 1,288 | 2,456 | 3,654 | 5,183 | 7,124 | ||||||||||||||||||||||||||||||||
Change in cash & equivalents | 166 | 822 | 1,168 | 1,198 | 1,529 | 1,941 | 2,265 | ||||||||||||||||||||||||||||||||
Ending cash balance | 9,389 | ||||||||||||||||||||||||||||||||||||||
Check | OK | ||||||||||||||||||||||||||||||||||||||
Supplemental Items | |||||||||||||||||||||||||||||||||||||||
Cash Interest Paid | NA | ||||||||||||||||||||||||||||||||||||||
Cash Taxes Paid | |||||||||||||||||||||||||||||||||||||||
Levered Free Cash Flow | 422 | 448 | |||||||||||||||||||||||||||||||||||||
Unlevered Free Cash Flow | 112 | 468 | |||||||||||||||||||||||||||||||||||||
Change in Net Working Capital | (8) | ||||||||||||||||||||||||||||||||||||||
Net Debt Issued | (50) | ||||||||||||||||||||||||||||||||||||||
Net Cash From Discontinued Ops. – Investing | |||||||||||||||||||||||||||||||||||||||
Historical and Projected Balance Sheet Statement | |||||||||||||||||||||||||||||||||||||||
Current Assets | |||||||||||||||||||||||||||||||||||||||
Cash & equivalents | |||||||||||||||||||||||||||||||||||||||
Accounts Receivable, Net | 117 | 186 | 212 | 272 | 357 | 443 | 565 | ||||||||||||||||||||||||||||||||
Deferred Income Tax Asset (Short-Term) | |||||||||||||||||||||||||||||||||||||||
Other Current Assets | 160 | ||||||||||||||||||||||||||||||||||||||
Short-Term Investments | |||||||||||||||||||||||||||||||||||||||
Total Current Assets | 490 | 344 | 676 | 1,568 | 2,762 | 4,020 | 5, | 634 | 7,661 | 10,048 | |||||||||||||||||||||||||||||
Goodwill and other intangibles | 1,424 | 1,478 | 1,482 | 1,468 | 1,464 | 1,459 | 1, | 454 | 1,449 | 1,444 | 1,439 | ||||||||||||||||||||||||||||
Other Noncurrent Assets | |||||||||||||||||||||||||||||||||||||||
Long-term Investment | |||||||||||||||||||||||||||||||||||||||
Deferred Income Tax Asset (Long-Term) | 134 | 141 | |||||||||||||||||||||||||||||||||||||
Total Assets | 2,049 | 2,130 | 2,053 | 2,424 | 3,337 | 4,558 | 5,847 | 7,500 | 9,574 | 12,020 | |||||||||||||||||||||||||||||
Liabilities & Shareholders Equity | |||||||||||||||||||||||||||||||||||||||
Current Liabilities | |||||||||||||||||||||||||||||||||||||||
Accounts Payable | |||||||||||||||||||||||||||||||||||||||
Accrued Exp. | 179 | 194 | 257 | 286 | 435 | ||||||||||||||||||||||||||||||||||
Curr. Port. of LT Debt | |||||||||||||||||||||||||||||||||||||||
Unearned Revenue, Current | 161 | 210 | 219 | 434 | 541 | 645 | 781 | ||||||||||||||||||||||||||||||||
Other Current Liabilities | |||||||||||||||||||||||||||||||||||||||
Total Current Liabilities | 319 | 480 | 580 | 722 | 862 | 1,044 | 1,269 | ||||||||||||||||||||||||||||||||
Def. Tax Liability, Non-Curr. | |||||||||||||||||||||||||||||||||||||||
Other Non-Current Liabilities | |||||||||||||||||||||||||||||||||||||||
Total Liabilities | 1,546 | 1,623 | 1,927 | 2, | 103 | 2,494 | 3,056 | 3,548 | 4,238 | 5,141 | 6,169 | ||||||||||||||||||||||||||||
Additional Paid-in Capital | 491 | ||||||||||||||||||||||||||||||||||||||
Retained Earnings (Accumulated Deficit) | 182 | 532 | 989 | 1,511 | 2,170 | 2,967 | 3,929 | 5,101 | 6,519 | ||||||||||||||||||||||||||||||
Treasury Stock | (134) | (350) | |||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income | (176) | (112) | (195) | (319) | |||||||||||||||||||||||||||||||||||
Total Common Equity | 497 | 501 | 126 | 842 | 1,502 | 2,298 | 3,261 | 4,433 | 5,850 | ||||||||||||||||||||||||||||||
Minority Interest | |||||||||||||||||||||||||||||||||||||||
Total Shareholders’ Equity | 503 | 321 | 843 | 2,299 | 3,262 | 4,434 | 5,851 | ||||||||||||||||||||||||||||||||
Total Liabilities & Shareholders’ Equity | 9,575 | ||||||||||||||||||||||||||||||||||||||
OK` |
Valuation
Financials Summary | |||||||||||||
Projected Fiscal Years Ending March 31 | |||||||||||||
10-Year US Treasury | 0.64% Yunzhi FENG: Yunzhi FENG: Last updated on May 6, 2020. Data source: FRED |
Forecast Summary | |||||||||||
Expected Market Return | 6.67% | ||||||||||||
Market Risk Premium | 6.03% Yunzhi FENG: Yunzhi FENG: Last updated on May 1, 2020. Data source: Aswath Damodaran Website |
Revenue | Growth Rate | ||||||||||
Beta | 1.02 | 1,488 | 2,187 | ||||||||||
CAPM | Cost of Equity | EBITDA Growth Rate | 18.4% | 20.1% | 20.6% | 21.7% | 20.8% | ||||||
Cost of Debt | EBITDA Margin | ||||||||||||
After-tax Cost of Debt | NI Growth Rate | 21.8% | |||||||||||
Target Gearing | 10.0% | NI Margin | 21.5% | ||||||||||
WACC | |||||||||||||
Valuation date | 5-May-20 | ||||||||||||
Next year end date | 31-Dec-20 | ||||||||||||
Match Valuation Model – Discounted Cash Flow Valuation | |||||||||||||
FCFF Valuation | |||||||||||||
Free Cash Flows | |||||||||||||
EBIT * (1-tax rate) | 611 | 769 | 1,113 | 1,356 | 1,638 | ||||||||
Non-cash Interest Adjustment | |||||||||||||
Net Change in Working Capital | |||||||||||||
Free Cash Flows to Firm (FCFF) | 383 | 1,352 | 2,585 | 4,132 | 6,540 | 9,516 | |||||||
Years to Discount | 0.66 | 1.66 | 2.66 | 3.66 | 4.66 | 5.66 | |||||||
Cost of Capital | |||||||||||||
Discount Factor | 0.96 | 0.90 | 0.84 | 0.79 | 0.74 | 0.70 | |||||||
PV Free Cash Flows to Firm (FCFF) | 367 | 1,217 | 2,184 | 3,275 | 4,866 | 6,644 | |||||||
FCFF Fair Value Multiple Method | |||||||||||||
EBITDA Multiple | 16.9x Yunzhi FENG: Yunzhi FENG: Source: Siblis Research, Multiples of EV/EBITDA of Internet companies |
||||||||||||
Terminal Year EBITDA | |||||||||||||
Terminal Value | 36,913 | ||||||||||||
Present Value of Terminal Value | 27,461 | ||||||||||||
Terminal Value as % of Total Value | 69.8% | ||||||||||||
Present Value of Forecast FCF | 11,909 | ||||||||||||
Forecast Period as % of Total Value | 30.2% | ||||||||||||
Enterprise Value | 39,370 | ||||||||||||
– Debt | (2,098) | ||||||||||||
+ Cash | 791 | ||||||||||||
Equity Value | 38,063 | ||||||||||||
Shares outstanding | 283 | ||||||||||||
Fair Value Share Price | 134.59 | ||||||||||||
Current Share Price | |||||||||||||
Upside | 68.0% | ||||||||||||
Match Valuation Model – | Residual Income | ||||||||||||
Abnormal Earnings | |||||||||||||
Net Income | |||||||||||||
Equity Charge | 102 | 156 | 301 | ||||||||||
807 | 951 | 1,116 | |||||||||||
0.69 | |||||||||||||
PV Residual Income to Equity | 479 | 583 | 700 | 770 | |||||||||
Residual Inome Valuation Method | |||||||||||||
Current Equity Book Value | |||||||||||||
Present Value of Perpetuity with Growth | 20,913 | ||||||||||||
83.9% | |||||||||||||
Present Value of Forecast Residual Income | 3,707 | ||||||||||||
24,940 | |||||||||||||
88.19 | |||||||||||||
80.100 | |||||||||||||
10.1% |
Cover Sheet
Name of Students in Group
1. Yuanhan Cheng
2. Yunzhi Feng
3. Ruikun Ma
Name of Company (Ticker): Match Group (MTCH)
Current Stock Price:
Estimated VPS
Recommendation:
P=80.1
V=111.4
Buy
Date: May 5, 2020
Name of Comparable (Ticker): Spark Networks (LOV)
1. Industry & Strategy Analysis
1.1 Industry Overview
The current dating services market is segmented into three sub-sectors, matchmaking, online dating and casual dating. Matchmaking serves the purpose for life partners who are willing to enter into a long-term committed relationship by mathematical algorithms. Online dating offers a platform where members can chat, flirt or fall in love which focused on casual contacting among the members. Users normally carry out the search by their own by applying search filters based on criteria such as age or other attributes. Casual dating establishes sexually oriented contacts which clearly focus on non-committal erotic adventures. Match Group falls in the subsectors of primarily Matchmaking and also Online dating.
Growth potential, especially in the U.S. The global revenue in the Dating Services market amounts to US$5.7 billion in 2019. Most of the revenue is generated in the Matchmaking category. When comparing figures globally, it can be noted that most of the revenue is generated in the U.S. with US$1.8 billion in 2019, followed by Europe, which had a revenue of US$1.1 billion in 2019. Revenues in China are the smallest in this comparison with US$1.1 billion in 2019.
Source: Statista
New initiatives and cooperation bringing in more opportunities In the future, dating apps with new concepts will be established, such as Whispar, where users can create an audio-profile. Many different algorithms are being developed to find the most compatible matches. For example, Tinder cooperates with Spotify to match potential partners based on their taste in music. New algorithms and AI-powered solutions like AIMM, Bernie or betterhalf will also boost new developments. Furthermore, we expect Dating Services to converge with social networks. Dating portals will focus less on the search for a partner for life and will rather place more emphasis on meeting new people instead (like Badoo). Also, social media platforms like Facebook are already rolling out their own dating features, boasting advantages many other providers don’t have more than 2 billion active users.
Unsettled competition landscape The dating industry is competitive and has no single, dominant brand globally. Although Match is undoubtedly the largest public company in the sector, the apps in Match’s portfolio, Tinder, PlentyOfFish, OkCupid, and match.com, still compete with a large number of other matchmaking apps. Tinder is currently Top 3 in the U.S. market and the rank of top dating apps are still changing, making opportunities for every market player. Many social media platforms are gradually entering the matchmaking industry as well.
Source: Statista
1.2 Company Overview
1.2.1 Competitive advantages
Match Group’s large and holistic portfolio ensures network effect, complimentary services and more stable profitability.
The industry is characterized by network effects, and the dominance of Tinder, which has nearly 6 million subscribers, along with some of Match’s more targeted brands such as Hinge, position the firm for continued success. Additionally, as a result of these network effects, the industry has undergone consolidation which has allowed Match Group to expand its position in the market through acquisitions and position itself well for long-term growth. With the holistic portfolio, Match Group will be able to generate revenue with less risks even in the case of increased competition, compared to its competitors that operate only one brand. It also helps Match to capture customers from different background with different preferences, maximizing its profitability. Online dating is a strong long-term secular trend and Match Group is currently dominating the market.
Match Group’s international expansion and consolidation will allow it to maintain impressive growth into the future.
Match Group’s currently offered in 190 countries and its portfolio of 45 brands allows it to focus on specific regions and demographics to optimize user experience. Match Group expects 25% of revenue to come from the Asia-Pacific region alone by 2023[footnoteRef:1] which has nearly 300 million single adults, four times the number of single adults in North America. Diminishing stigmatization in East Asia, where there is additional marital pressure from families, will pave way for the increasing popularity of dating apps like Tinder. This trend is evidenced by the growing percentage of international subscribers and revenue contribution. [1: WedBush 2019 Analyst Report]
Monetization of the ‘Freemium’ Model:
As users pay for premium features, they will have more of an incentive to stay with the respective dating app. Thus, customer loyalty will increase in correlation with free users to paid subscribers. Historical data suggests high paying will from Match’s customers and will be a strong revenue driver with the fast expansion of the user base. Additionally, this will create a barrier to entry for potential new entrants and create switching costs for existing users. However, the undesirable growth rate of user base will harm the business to a large extent.
1.2.2 Key risks
Tinder’s Cannibalization of other Brands:
As of 2018, Tinder accounted for nearly half of Match Group’s total users and 47% of their total revenues. Tinder has grown at a faster rate than the rest of Match’s portfolio of brands and Match is very reliant on Tinder’s continued performance for their long-term success. The growth of Tinder has come at the expense of many of Match’s other brands including OkCupid. Many of Match’s brands are very segmented, while Tinder is very broad, but considering people only have a couple of dating apps, Tinder’s popularity has cost some of their other brands growth opportunities.
Stigmatization + Trust with Dating Apps:
72% of people in the U.S. do not use dating apps, 14% of which cite a stigma as the reason why, while 40% cite a distrust of the apps themselves. With growth, this stigma is expected to decrease, however at the current time 75% of people believe there is a small stigma attached to dating apps. If Match is to continue to grow into the foreseeable future, dating apps must continue to become de-stigmatized by society.[footnoteRef:2] [2: All survey statistics are from the WedBush 2019 Analyst Report]
Personal Data:
Match Group has an abundance of personal user data that is highly confidential. Any outside privacy breach could have a significant brand impact. However, Match Group has been proactively seeking solutions to enhance safety and mitigate the risks by investing in and partnering with Noonlight.
1.3 Comparable Company Analysis
2. Accounting Analysis
3. Financial Analysis
4. Prospective Analysis
4.1 Key assumptions
Our forecast horizon ranges from 2020 to 2025, expecting the industry and the company will reach a steady state in 5 years. Details can be found in the excel file sheet of “Operating Assumptions”, categorized into revenue, costs, and balance sheet drivers.
Looking into the future, we project the revenue growth to be 28.7% in FY 20E, 31.4% in FY 21E, and 26.3% in FY 24E. We come up with the revenue assumptions by projecting the revenue growth for the following segments.
We expect direct revenue to be a revenue growth engine in the future. We further divide it up geographically and breakdown into Average Subscribers multiplied by ARPU (Average Revenue Per User). For Average Subscribers, we forecast a growth rate of 20.0% for North America and 30.0% for International in FY20E, which are slightly lower than the historical growth rates. We believe that future penetration will be attributed to international expansion, demonstrating a trend of decreasing ratio of North America to International, on consideration of the massive untouched international market. As for ARPU, we forecast a relatively stable rate of change expecting no significant change in terms of monetization and the freemium model. Total direct revenue is expected to grow 29.2% in FY20E and 26.5% in FY25E.
Indirect revenue accounts for a small and decreasing portion of the total revenue, from 4.5% in 2016 to 2.1% in 2019. We estimate similar growth rate to be displayed in the future, around 3.0%-4.0%, since advertising is and will not be the main focus of the company’s business strategy.
Based on the above projections, from FY 20E to FY 25E, total revenue is expected to grow 28.7% to $2,639 mm in FY20E and at a CAGR of 29.0% from FY20E to FY25E. Revenue contributed by direct revenue will increase from 98.3% to 99.4%.
The main costs include cost of revenue, SG&A expenses, stock-based compensation, and R&D expenses. The EBITDA margin stays stable around 29.1%-33.9% in 2016-2019 and is expected to remain 32.6%-33.4% in FY20E-FY25E. Cost of revenue mainly consists of in-App purchase fee paid to Apple and Google, employee-related compensation, and other expenses to enable the App and internet services like data center rent and bandwidth costs, taking up 25.7% of revenue and giving a 74.3% gross margin. Selling, general & admin expenses account for the largest but decreasing proportion of the operating expenses, equaling 44.1% in 2016 to 33.3% in 2019 of the total revenue. R&D expense takes up 7.0%-7.4% of the total revenue. Since cost of revenue, SG&A expenses, and R&D expense all demonstrate stable and clear trend, we expect them to keep following the historical trend by assuming average growth rates.
We estimate accounts receivable and unearned revenue as percentage of revenue, accrued expenses and accounts payable as percentage of cost of revenue. The turnover rates remained stable during the past four years, so we use the mean of historical figures as assumptions for the forecast period. Match Group doesn’t have inventory due to its business nature as an internet company.
The company is not a capital-intensive business with only 4.5% of total assets in Plants, Properties, and Equipment. We forecast depreciation as percentage of net PP&E beginning balance and capital expenditure as percentage of revenue with reference to historical figures, given their stableness in the past four years.
4.2 Future key ratios
5. Valuation
5.1 Cost of Capital Calculation
Cost of debt was assumed to be equal to the historical percentage of interest expenses in total debt.
As over 80% of Match’s business operates in U.S. and its shares are listed in the U.S., we choose the 10-year treasury yield of US government bond as the risk-free rate, on our valuation date of May 5, 2020, the 10-year treasury yield is 0.64% according to FRED.
We use the historical average of around 6.03% as US Equity Market Risk Premium with reference to Aswath Damodaran’s Website’s current data that’s last updated on May 1, 2020.
We extracted the listed competitors from Capital IQ among software and online application services companies. From the list we un-lever each company’s equity beta using their leverage ratios. The average unlevered beta arrives at 0.94.
Given the company management’s preference for equity financing instead of debt financing, we assume Match’s optimal target capital structure is 10% debt. We assume a debt beta of 0.2 according to the historical debt market risk feature. Thus, we arrive at a levered bottom-up beta of 1.02 for Match Group.
Comparable Companies |
Equity Beta |
Leverage Ratio |
||
Twitter, Inc. (NYSE: TWTR) |
1.20 |
27.42% |
||
Facebook, Inc. (Nasdaq: FB) |
1.30 |
9.88% |
||
SINA Corporation (Nasdaq: SINA) |
32.68% |
|||
Snap Inc. (NYSE: SNAP) |
1.90 |
35.38% |
||
Zillow Group, Inc. (Nasdaq: ZG) |
42.25% |
|||
Pinterest, Inc. (NYSE: PINS) |
0.74 |
9.80% |
||
Yelp Inc. (NYSE: YELP) |
23.53% |
|||
TripAdvisor, Inc. (Nasdaq: TRIP) |
12.58% |
Source: Capital IQ
5.2 Valuation and Sensitivity Analysis
We valued the company using Residual Income method and DCF. Details of the valuation can refer to the excel file sheet “Valuation”. The DCF approach yields an implied share price of $134.6 and the Residual Income method yields $88.2 under our base-case assumptions.
We believe the key sensitivities lie in the subscriber growth rate, cost of revenues as % of revenue, SG&A expenses as % of revenue and we did a sensitivity analysis on the valuation by adding bear-case assumptions, as a toggle in the excel file “Operating Assumptions”. If the North American subscriber growth rate decreases by 1%, the international subscriber growth rate decreases by 1.5%, the cost of revenues as % of revenue increases by 1.5%, and the SG&A expenses as % of revenue increases by 2%, it will result in an implied share price of $85.17 for the DCF approach and $43.12 for the Residual Income method. We can tell from the sensitivity analysis that the company’s operating and stock performances are highly sensitive to the user growth and cost control.
6. Recommendation
We calculated our estimated value per share to be $111.4 as the average of the implied share prices of DCF and Residual Income method, resulting in 39.1% upside. Considering the high upside under our current optimistic assumptions and the high uncertainties in both current economy environment and stock market, we give the Match Group a conservative rating of Buy.
There are room for improvement in our analysis as follows. In our valuation analysis, we make the operating assumptions in an optimistic manner, since we don’t have adequate and solid data support for key numbers like the subscriber growth rate in the current disrupted COVID-19 situation but only several qualitative news sources. Also, assumptions used in the valuation part, like the multiple, beta, ERP, may not completely reflect the current market conditions. The high volatility and uncertainties in the current market has made many investors leave the market and yielded low prices and low valuation range for the whole equity market. If time and resources allowed, we would try to reflect the economy and market conditions and its impact on Match Group more accurately into our analysis.
Worldwide Online Dating Revenue (USD)
Paying Online Dating users 2017 2018 2019 2020 2021 2022 2023 2024 1581 1763 1958 2141 2289 2397 2471 2530 Non-paying Online Dating users 2017 2018 2019 2020 2021 2022 2023 2024 0 0 0 0 0 0 0 0 Total
2017 2018 2019 2020 2021 2022 2023 2024 1581 1763 1958 2141 2289 2397 2471 2530