The Next Tech Stock I'm Buying

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Tech IPOs tend to be known for two things: a lack of profits and a sky-high valuation. Plenty of stocks from Twitter toPandorahave come on the scene sporting a similar profile and subsequently flopped. One recent IPO, however, has the components of a runaway growth stock without the usual lack of profits and pricey valuation.

I'm talking about Match Group, the parent of popular online dating sites such as, OkCupid, and Tinder.

There are three reasons why Match could be the next breakout stock.

  1. The company is the clear leader of growing industry.
  2. The stock is modestly valued at a forward P/E of 16, better than theS&P 500average.
  3. New opportunities abound.

Let's take a look at each one of these factors.

A recipe for success

There may be no better sign of future success than dominating an emerging tech industry. Amazon.comdid that with e-commerce just asFacebook haswith social networking.

Match has a similarly strong position in online dating. It owns four out of the top five dating apps in North America and three of the top five globally.Match isn't without competitors, and the industry is a fragmented, an element visible in the company's own stable of 45 products to suit different demographics and types of connections. But the company has shown a knack for developing leading sites, and its recent acquisition of PlentyOfFish shows it isn't afraid to spend to absorb competition, a similar strategy to Facebook, which has acquired apps like Instagram and WhatsApp to add to its social media leadership.

The search for love is timeless, and with the advent of the Internet, online dating figuresto be as well. Match offers a solution to a most basic human need, and many of its users spend considerable time each day with its products. The company may not have the runaway growth rate of some other tech IPOs, but its growth path should be a long one.

Match currently has 59 million monthly active users, but claims an addressable market of 511 million, which is made up of unattached adults with Internet access in North America, Western Europe, and select other countries. The number of active users should continue to expand as attitudes toward online dating improve and as the percentage of adults who are single increase.

Good value

After two earnings reports as a publicly traded company, Match has easily exceeded estimates in both quarterly reports and carries a reasonable P/E valuation of less than 30. Revenue growth accelerated to 21% in its most recent report, and the nature of its cost structure means that profits will grow faster than revenue as the company is essentially a subscription service, counting on paid members for the bulk of its revenue. Adjusted net income grew 30% in its most recent quarter. With its modest valuation, the stock will move higher if the company continues to beat estimates.

Opportunity knocks

There are a number of potential opportunities that the company has not yet tapped into or has only barely done so. The international market represents a huge opportunity for Match. Revenue grew 40% outside of North America in its most recent quarter, and that growth lane should be lasting as Match penetrates new countries and adoption rates rise to that of the U.S. As companies like Facebook have shown, the international market tends to be much larger than the domestic one as these types of companies mature.

Similarly, I expect Match to develop advertising revenue in the future. Currently, it makes a majority of its income from paid users, but the demand for free sites is huge. An app like Tinder for example, which ask users to swipe right or left according to preference, seems tailor-made for advertisers. Tinder itself shows the explosive power of Match products, as it's rapidly become the most popular app in Western countries in just a few years.

Finally, the possibility of an acquisition looms for Match. With its growth opportunities and trove of user data, it would be easy to see a company like Facebook jumping in and snatching up the much smaller company. Facebook has thus far avoided dating sites, but the social network claims connecting the world as its mission, and offering dating apps would seem to fit right into that. If revenue growth slows, Facebook could look to a company like Match.

With industry leadership, a modest valuation, and ample growth opportunities, Match is ripe for buying. I'm planning to scoop shares as soon as I can.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends, Facebook, Pandora Media, and Twitter. 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.

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