Although it's now accepted wisdom that online dating is the most popular way to meet a future mate, the industry still is perceived by many investors as prone to fads. Some new online service always seems to be ascending while yesterday's winners are declining.
A few years ago, Tinder emerged as the hot new service. As time has gone on, the short interest on stock of Match Group, the parent of Tinder, since its IPO two years ago has increased to 46 percent of the float (according to Jefferies, meaning it would take 16 days to cover that position). Perhaps that's an expectation that, as time goes on, the service's popularity will wane.
I own Match's stock because I believe there's something fundamentally wrong with that logic.
There was a time 6 to 8 years ago in the social networking space when it wasn't obvious that Facebook would "win." We pointed to MySpace, Friendster, and services in other domains such as Netscape where certain online services would explode in popularity and then burn out and fade. Yet, after Facebook's IPO and its success transitioning to mobile, there came a point when investors had to change their thesis about Facebook from fad to dominant.
I believe we're on the path to the same thing happening with Tinder. We will soon get to a point where most young people who decide to try online dating will opt for a Tinder account. In 2013, only 10 percent of Americans between 18 and 24 had used an online dating service. By 2015, Pew found that percentage had nearly tripled, to 27 percent. And they found most of that new growth was going to Tinder.
In the most recently reported quarter, Tinder said that it is up to over 2.5 million paid subscribers to its service. And the rate of growth is accelerating quarterly. Q3's paid members were up 476,000 from the prior quarter versus 224,000 from Q1 to Q2. That's a 12 percent quarterly growth rate to 23 percent.
Part of the reason for the growth is that Tinder is now hitting critical mass for this demographic in the same way this occurred for Facebook: A good proportion of everybody you want to reach on the service is there.
But another reason for the increase is that Tinder has been rolling out new add-on paid services for subscribers that give its members more information. A la carte services give you more Super Likes and Boosts. The newly rolled out "Tinder Gold" lets you see others who liked your profile. These additional add-on services are being priced dynamically by Tinder to see what prices work best in which geographies.
What Tinder is doing in rolling out all these additional a la carte paid services, as well as its core subscription service, reminds me a lot of how all the big video game publishers (such as EA, Activision and Take Two) have done with selling downloadable content after selling you a core gaming title. It took a while for analysts and investors to catch on to how this change was going to significantly increase the industry's profitability in a secular manner. However, once this started to happen, the stock prices and price targets increased quickly.
With all this happening at once — growth, critical mass, new supplemental services that further increase the service's profitability, as well as recent successful experimentation with advertising — Tinder is poised to gain a lot of operational leverage in the next few years as it further scales out its service.
It won't be without competition. Bumble is doing well in the United States. International growth will also face a host of local players in each market. Additionally, unlike Facebook, where its users stick around conceivably forever, Tinder has to keep attracting its next generation of users as the folks who find a mate leave the pool. But the upside for Tinder is still significant.
Some analysts believe only 5 percent of Tinder's current users are paid subscribers. And the current users are likely only a fraction of the 500 million total addressable market around the world for online dating services.
There is another thing that could happen in 2018 to help Match's stock price. Match's parent, InterActive Corp, currently owns 80 percent of Match. It will likely be the case that there will be some IAC event whereby they increase the float of Match. This will allow more (and larger) investors to own the stock afterwards, which should help the stock price.
If you put it all together, Match has a number of strong tailwinds going into 2018. If the perception of Tinder changes from just another player fighting for a piece of the pie to the dominant leader riding several waves in a fast-growing market where its profitability is going to increase sharply, that should help the stock substantially.
Disclosure: Affiliates controlled by Eric Jackson have long positions in MTCH, EA, ATVI, and TTWO.
Commentary by Eric Jackson. Sign up for Eric's monthly Tech & Media Email. You can follow Eric on Twitter @ericjackson .
