Purpose
In this post, we’re going to analyze online dating apps. We will look at the business and future prospects to understand if it is a good investment. We will further focus on how these companies are taking steps to maximize shareholder value. And the risk of dilution.
The Business
If you haven’t been under a rock over the last 10 years or so, you probably know what these companies do. What you might not know is that online dating is now the most common way for couples to meet in the United States1. Bumble operates through five apps. Bumble dating, Bumble friends, Badoo, Fruitz, and Official. Across all of them, 42 million people used the app on a monthly basis. Bumble having a record 2.3 million paying users for the year 2023. Badoo had 1.2 million paying users. In total, they have 1200 employees, only 200 of which are in the U.S.A.
What you might also not have known is that user engagement and growth is high in the first three quarters of each year. And the last two quarters there is an uptick in paid users. And all metrics are highest in January in the build up to Valentine’s day.
And for every dollar you give Bumble through the app, Apple App Store takes 30 cents and Google Play Store takes 15 cents. Depending on your platform. Let’s look at the revenue breakdown for 2023: Total : 1 billion
Bumble : 844 million
All others : 200 million
Has to be noted that Bumble revenue is increasing YoY while for all else it is decreasing. But the increase in the number of paying users is what really makes this investment interesting. These 500k people make this a growth company at 20% increase in users YoY. The increase in Bumble App Revenue was due to growth in core markets and international expansion, partially offset by unfavorable fluctuations in foreign currency exchange rates2. What we have to see is will this growth continue.
A note about the other apps: their paid users are significant too and they haven’t seen that much growth in the Americas yet. Bumble has shared infrastructure with these apps, so its expertise can be leveraged to grow these apps in markets it already understands and dominates.
So these other apps listed above could be poised for growth. But I’m a pessimist with valuing businesses so I wouldn’t count on it.
Valuation
With a gross margin of 70% that is consistent over the last few years, let’s assume a profit margin of 18% which is the same as MTCH. Let’s say after 5 years their operations stabilize and they reach this margin. And say they’re growing at 20% YoY and now in 2029 make a revenue of 2.4 billion. I’m being quite generous here.
So we get 432 million dollars with that 18% profit margin as net income. Let’s say we have a PE ratio of 20. We get a market cap of 8.6 billion. Which makes it a ten bagger. Best case. Debt isn’t significant enough so I haven’t added it in here.
Now, say the growth is quite slow, let’s assume a 10% growth rate over 5 years. That’s 1.63 billion in revenue. Same calculation gives us 293 million in net income. With a PE of 10 that is 2.93 billion. Which still makes your money 3x. Currently the debt (after subtracting all cash) is 345 million. So again it doesn’t really make that much of a difference.
You can see how these valuations could be inaccurate. The management can take up way too much debt to grow too fast. They can fail to meet the margins of MTCH. The dating app marketplace is highly competitive and let’s face it, Bumble is not many people’s first choice. So maybe they would have to spend more just to keep up with the competition.
So I am doing a Monte Carlo simulation — Profit margin moving from 8% to 18%, growth moving from 10% to 20%, and PE moving from 10 to 20. After 10000 we get:
With a mean valuation of 4.5 billion this investment could potentially be a 5 bagger.
Maximizing Shareholder Value
In May 2023, Bumble announced a share repurchase program of 150 million. And in November 2023, they increased it to 300 million. They already did some purchases so as of December 2023, 143 million more can be spent to buyback more stock. Here is the killer though — the company bought back 9.7 million shares at a price of 14$. That’s a bad deal since now BMBL trades at 6.65$.
Furthermore, to drive costs down they are firing 350 employees. Bringing their workforce down to 900 or so. I always wondered why a dating app needs so many people. What are all these people doing? So it’s good this issue is being addressed by the management. These layoffs will incur a one-off 25 million charge in severance and benefits.
Dilution Risk
The company pays out 100 million each year in stock based compensation. They will probably have to give stock refreshers to retain talent since now that the price crashed from 70$ to 6.5$, all of their employees are underpaid with respect to the market rate. At a price of 6.5$, this means stock based compensation is now 16 million shares this year minimum. This is not counting refreshers. With 130 million total shares outstanding, I see a dilution of at least 8% which is not great.
However, we must remember they are buying back their own shares. So as of June, 2024 they have 126 million shares which is not bad. But if the stock stays at these prices or lower for an extended period, they will eventually run out of juice to buy back and their employees would need more stock to be a good worker bee. So this is a very real risk going forward.
Conclusion
This is a good company growing at a good rate. I don’t feel comfortable with their high expenses. In my mind, this is mobile app that shouldn’t take hundreds of millions to run. Apart from sales & advertising, I still can’t see why this business is so expensive to run. I don’t like the fact that in the next few years there is a real risk of dilution if the share prices stay suppressed.
For these reasons, I am asking for feedback. Because I don’t truly understand how much of an impact dilution can have on this company over the next few years. Thank you for reading!
Bumble Annual Report 2023, Page 7
Bumble Annual Report 2023, Page 58