Is Match Group a Better Social Networking Stock Than Facebook?

MarketsMotley Fool

Match Group (NASDAQ: MTCH) is often left out of discussions about social networks, but the parent company of Tinder still dominates the industry's online dating niche. Match's stock rallied about 80% over the past 12 months on a streak of earnings beats, which easily outperformed Facebook's (NASDAQ: FB) single-digit gain.

Does Match's sharper focus make it a better social networking stock than Facebook? Let's take a closer look at both companies to find out.

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The differences between Match and Facebook

Match owns Tinder, OKCupid, Plenty of Fish, Hinge, and other popular dating apps. Its main growth engine is Tinder, which generated nearly half its revenue last year. Match generates about 90% of its revenue from subscriptions, and the rest mostly comes from online ads.

Match's apps use a "freemium" model, which lets users unlock premium features with subscriptions. Tinder's first premium tier, Tinder Plus, lets users swipe in other cities or countries before they arrive, use unlimited swipes, use more "Super Likes" to get another user's attention, undo swipes, and promote their profiles with temporary "boosts".

Two years ago, Match introduced Tinder Gold, an upgrade for Plus that lets users see who "liked" them right away. Tinder Plus costs $10 per month, and the Gold upgrade costs an additional $5. Tinder had 4.7 million subscribers last quarter, while Match's entire ecosystem had 8.6 million subscribers, marking a 16% increase from a year earlier.

Facebook generates nearly all of its revenue from online ads. It crafts targeted ad categories from its user profiles, and allows companies to target specific demographics (based on age, gender, location, interests, and other data) with their ads. Facebook generates a tiny sliver of its revenue from its other products, which include hardware devices like its Oculus VR headsets and Portal smart speakers.

Facebook's ecosystem includes its namesake app, Facebook Messenger, Instagram, and WhatsApp. Last quarter, Facebook claimed that over 2.1 billion use that "family" of services once per day, and that 2.7 billion people used them once per month. Facebook is expanding into adjacent markets, including e-commerce and online dating, but those efforts remain secondary side bets for now.

Which company is growing faster?

Both Match and Facebook faced decelerating sales growth over the past year.

YOY revenue

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Match

36%

36%

29%

21%

14%

Facebook

49%

42%

33%

30%

26%

Match's revenue growth decelerated because it lapped its launch of Tinder Gold, and it doesn't plan to introduce a new premium tier for Tinder this year. Match expects its revenue to rise 14%-16% annually during the second quarter, which indicates that its growth will remain stable. Wall Street expects Match's full-year revenue to rise 16%.

Facebook's revenue growth decelerated due to a series of privacy, security, and fake news scandals, which throttled its user growth and forced it to tackle problematic accounts and ads. As a result, its core platform's growth in the U.S. and Canada -- its two most profitable markets -- stagnated, adding just 1 million monthly active users (MAUs) last quarter.

Facebook expects that slowdown to continue. During last quarter's conference call, CFO Dave Wehner warned that its "revenue growth rates will decelerate sequentially throughout 2019 on a constant currency basis," and that "ad targeting related headwinds will be more pronounced in the second half of 2019." It didn't provide exact numbers, but Wall Street expects its second quarter revenue to rise 25% for the second quarter and 24% for the full year.

Which company is more profitable?

Match and Facebook's operating margins both contracted year-over-year last quarter, but the former clearly fared better than the latter:

Operating margin

Q1 2018

Q1 2019

Match

28%

26%

Facebook

46%

22%

Facebook is struggling with surging expenses from legal costs, fines, and the expansion of its ecosystem, while Match is avoiding most of that drama. As a result, Facebook's EPS plunged 50% annually last quarter, and analysts expect a 7% decline for the full year. However, they still expect Facebook to recover with 32% earnings growth next year -- a high growth rate for a stock that trades at 20 times forward earnings.

Match's EPS rose 27% annually last quarter. Wall Street expects 12% growth for the full year, followed by 23% growth next year. Those are solid growth rates, but Match's forward P/E of 29 suggests that much of that growth is already priced in.

The bottom line

Match isn't necessarily a "better" social networking stock than Facebook, which remains the 800-pound gorilla in that market. It faces less scrutiny and its subscription-based model is arguably more stable than Facebook's ad-based one, but the stock is still a bit too pricey.

Facebook faces more headwinds, but they should eventually wane. When that happens, the stock should look undervalued relative to its long-term growth potential -- which makes it a better buy than Match for now.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook and Match Group. The Motley Fool has a disclosure policy.