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Is This Online-Dating Stock a Buy?

Online dating has exploded in popularity in the last few decades. Recent polls indicate that about 15% of American adults have used an online-dating platform.

On this week's episode of Industry Focus: Tech, Dylan Lewis talks with guest co-host Sarah Priestley about what investors should know about this bubbling new market. Find out:

  • Why they're just about the only safe way to play this market
  • Some significant concerns the company is going to have to address
  • How appealing of a buy Match Group is today for investors who want exposure to the space

A full transcript follows the video.

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This podcast was recorded on Jul. 8, 2016.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, July 8th, and we're talking tech and online dating. I'm your host, Dylan Lewis, and I'm joined in the studio by Fool.com's Sarah Priestley. Sarah, how's it going?

Sarah Priestley: It's good, it's nice to be here! Thank you very much for having me.

Lewis: You are making your debut on the podcast.

Priestley: This absolutely is my debut, so everyone should give me a lot of leeway, I think.

Lewis: But you've been at The Fool now for four, five months?

Priestley: Four months, yeah.

Lewis: So, we felt like it was time to kind of christen you.

Priestley: Yeah, baptism of fire. (laughs)

Lewis: I'm very happy to have you on the show. You've been doing some awesome work in the tech and consumer goods space.

Priestley: Thank you!

Lewis: I'm excited. I think it'll be a lot of fun to have you on the podcast a little bit more regularly now.

Priestley: Okay, we'll see. (laughs)

Lewis: So we're talking about the online-dating market today. I think it's a very interesting market. Some interesting stats, just to set us off, set some background here: Use of online-dating sites or apps by 18-24 year-olds has tripled since 2013. Apparently, 15% of American adults have used online-dating sites and apps, according to Pew Research. One in 10 American adults spends more than an hour a day on a dating app according to Nielsen data. So there's clearly a lot of people using it.

I think any time you have this broad-stroke interest in a category, naturally investors are curious as to what's going on. So before we dive into one of the big companies involved in the space, do you want to paint a picture -- in terms of some industry numbers -- for the average users, and the size of this market?

Priestley: Sure. The industry is actually pretty large. There doesn't seem to be much analyst opinion on the industry so far, but we'll go in to talk about that later, because I think it's because people haven't been able to play the industry so well. It's actually valued at about $2.2 billion in revenue per year. The growth for the past five years has been 5% compound annual growth rate, and despite the fact that some people are saying the industry is growing down, it's actually expected to grow by $100 million per year for the next five years. So it has scope to grow.

Also, China is estimated to be worth $1.6 billion by the end of this year; they're getting massively into Tinder, particularly, and other online dating. And the market segment is mostly dominated by the 25-34-year-old category, at 33%, closely followed by 35-44-year-olds. So it's actually not the younger people who you would expect to be dominating the market, although they certainly are active in it.

Lewis: And the biggest player, the biggest fish in this pond, is Match. They control 25% of all online-dating services by market share. That is more than twice the next-largest competitor, which is eHarmony, which is just under 12%. And then, no one else in the space occupies more than 5%.

Priestley: Yeah! And there's actually an industry magazine, it's called Online Dating Magazine, and they pose it that there are, worldwide, 8,000 online-dating websites and apps created every year, and only 1% of these are successful. So that just shows you the amount of people who are jumping on this bandwagon.

Lewis: Yeah. So you have this one big fish, and after that, it's a heavily fragmented market space. Match is a natural segue here -- it's a perfect stat to lead into the conversation I want to talk about, because Match is the company we want to discuss. They're kind of the only real way to play this market. If it's something you're interested in on the investing side, they're the only game in town, right?

Priestley: Pretty much.

Lewis: So let's get a little bit of background on them.

Priestley: Match Group was spun off from IAC (NASDAQ:IAC), which we'll talk about a little bit more. They have a portfolio of over 45 brands, which is huge. So they're kind of on a spending spree to buy up everybody that's operating in the market. Since 2009, they've done 26 acquisitions, which is a phenomenal pace. They have 59 million active users across all of their brands, and 5.1 million of those are paid members. They're operating mostly in the U.S., but they have websites across 190 countries, and 38 languages.

Lewis: Which basically covers most of the globe, right? Depending on what stat you look at, there's 196 to low 200s, in terms of countries in the world. So that's pretty good reach.

Priestley: Yep. In any country you're in, you can online date. That's good. They also own the Princeton Review, which is kind of... I'm not sure how I feel about that being part of the company. The Princeton Review is a test-preparation company that mostly operates through providing test papers for SATs. They want to move that online, and they have a lot of ideas about how they're going to improve that business. It is interesting for them, but it fits strangely with the dating.

Lewis: Yeah, you look at their portfolio, and they have these 45 brands, all of them are heavily dating oriented. Match.com, Tinder, which we'll talk about a little bit more -- GenXPeopleMeet, DivorcedPeopleMeet -- it's kind of crazy the different properties that they own. And then, of course, the Princeton Review. IAC Interactive Corp, their parent company, is known for its online properties. I think that's why you have that seemingly odd combination, but it seems like, with what they want to do with the Princeton Review, the online focus in digital orientation kind of makes some sense. We'll get into the revenue mix more there.

But Match really hasn't been directly public for a long time. As I alluded to, they were nested under this publicly traded IAC up until last fall. They only recently sprung off. I think there are a couple different reasons for that. When we were prepping for this show, you talked about the idea that they wanted to...


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