What Makes Match Group's Business Model So Powerful

By Markets Fool.com

Image Source: Getty.

Continue Reading Below

In its short life as a publicly traded company, the market has struggled to make sense ofMatch Group Inc.(NASDAQ: MTCH). Since it debuted in November, the stock has bounced between $8 and $17. The online dating company has no true peer in the market as no other publicly traded companies are in the business of matchmaking, which has gone from a niche industry to mainstream. Still, there are a number of reasons to believe in the long-term potential of the business.

User-generated content

While Match doesn't have any direct peers in the public markets, it does share one important thing in common with other internet-based businesses likeFacebookandYelp.It's built on user-generated content. Unlike the traditional media model where companies had to pay to generate their own content, many internet companies save money by selling ads and subscriptions against user-created content.

This model has been more successful for some companies than others. Facebook has some of the biggest profit margins in the business world thanks to this model. TripAdvisorhas found steady profits from user-generated travel reviews. Others like Yelp andTwitterhave struggled in spite of the user-generated model. Match, however, is clearly one of the profitable ones with an operating margin of 24% in its latest quarter.

Operating leverage

Continue Reading Below

Match's dependence on user-generated content helps drive those outsized operating margins. It also helps give the business operating leverage, meaning that a gain in revenue leads to a greater gain in profits. Businesses with higher fixed costs tend to have this advantage. Since Match is a subscriber-driven business, its expenses are roughly the same regardless of the number of subscribers, so each additional subscriber fee flows largely unimpeded to the bottom line.In its most recent quarter, a 21% increase in revenue led to an 82% jump in operating income.

That kind of leverage should ensure rapid profit growth even if revenue growth slows. An increase in interest expense last quarter kept adjusted net income growth at 41%.

The company's most expensive line item is selling and marketing, which ate up 29% in revenue in the past quarter. However, it remained flat from the previous year, helping to boost profits. Another benefit of Match's subscription model is that additional customers don't come with extra costs. Since marketing is the biggest line item and word of mouth is a major driver of adoption, the company's margins should continue to expand as marketing costs become spread out over a larger customer base.

High customer need

Match's business, pairing individuals looking for a romantic connection, whether it be for marriage or a hook-up, is as timeless as any business around. Though in the greater history of romance, online dating is brand new, its popularity has surged because it expands the pool of eligible partners, helps users sort potential matches with search algorithms, and adds a level of convenience to the process that is unavailable in the analog world. As technology spreads and improves, the popularity of such products should continue to grow. The smartphone, for example, enabled the launch of Tinder in 2012, which has become the fastest online-dating product since.

Though Match's products have the caveat of eliminating their customers if they're successful in creating a relationship, the size of the company's addressable market -- in the hundreds of millions -- is so big that cannibalizing its own customers should not be a concern for investors. In addition, the positive word-of-mouth from creating successful relationships should help generate even more customers.

The shift to mobile has also yielded higher usage rates for the company's products and mobile users access the products at much higher rates than desktop users. For instance, the number of 18-24 year olds who have used online dating apps is now 22%, higher than the 19% that have used desktop sites.The success of their products can be seen in their popularity around the world wherever people have access to the internet. Match's products are now available in 38 languages in 190 countries.

Match is a unique business with a unique opportunity. As the pool of online daters grows, the company should be able to take advantage with its leading products and leverage that earn revenue for outsized profit gains. With operating margin already at 24%, the company is off to a good start.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Match Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.