“Motley Fool’s ‘Double Play’ Buy Alert on Recent IPO”Irregulars Quick Take Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)
The folks at the Motley Fool like to make a lot of the success of their “double down” or “double play” or “triple play” stocks, which generally is a reference to stocks that are either picked bybothof the founding Fool brothers (David and Tom Gardner, who together choose the stocks for their flagship Motley FoolStock Advisornewsletter), or that arere-recommendedby one of them once, twice or more times.
The assertion is usually that these kinds of re-recommended picks, which would naturally be the ones about which they have the most conviction, are those that do the best and make up for much of the very good long-term performance that Stock Advisor picks have shown. I don’t know if that’s always true, but there’s likely some fact behind it because they use it in their ads all the time — and it does make sense, the newsletter’s great published average return record must be in some large part because of the extraordinary thousand-plus% returns from stocks like Amazon and Priceline and Netflix that they’ve held for years, and those are the kinds of stocks that they’re likely to pick over and over again. Particularly David Gardner, who is the more growth-focused of the brothers and has “Wall Street thinks it’s too expensive” as one of his key criteria for picking “rule breaking” stocks.
And today, we’re being teased with another of these “re-rec” stocks — so what is it?
This is from the ad, to get you started:
“In Motley Fool Stock Advisor’s 14-year history, there have been only 4 occassions when legendary growth investor David Gardner has seen a company so extraordinary that he issued a “buy” alert within 5 months of its IPO….
“What was the first company to meet this remarkable standard?
“And just four months ago, David identified another small company that cleared this same high bar.
“The stock is already up 40% since David recommended it!
“But David doesn’t think the good times are over -not even close – he just issued a second buy alert for this same remarkable company.”
That’s probably nottechnicallytrue, since if theStock Advisornewsletter is 14 years old it didn’t come into being until five years after Amazon’s 1997 IPO… but itistrue (or it’s at least widely reported) that David Gardner publicly bought and recommended that crazy new online bookstore at or near the IPO, even if the Motley Fool publishing situation was a bit different back then (they had a few different services and letters before they went live with the current version of their flagship newsletter in 2002 — the Gardner brothers had an investment newsletter as early as 1993, but the Motley Fool really started life as an AOL Chat Board in 1994).
Some of the emails pitching this newsletter have also come in with those fantastical “like buying Amazon in 1997” teases, which, of course, make us see happy little dollar signs dancing in front of our eyes as we imagine those 20,000% returns that early Amazon investors earned (sometimes it’s hard to bee calm, cool and collected in your analysis when you see those dollar signs, isn’t it? Their dance is so tantalizing….)
And I suspect that a few of you might have noticed the answer to this tease already… but let’s just double-check the clues from the ad to make sure:
“While you can’t go back in time and invest in Amazon alongside David Gardner, I believe I’m offering you the next best thing…
“… a company with strikingly similar traits to what made David first issue his Amazon call.
“… market cap of less than $3.8 billion…
“Like Amazon, this company thrives off the growth of its ‘virtual community’ ….
“The company has grown the size of its user base by 63% annually for the past 4 years – giving it more than double the market share of its next closest competitor.
“Even more exciting, management still believes they’ve only captured 11% of the potential market for their product.”
So who is it? Well, the Thinkolator was a little slow to start after a long weekend — but we dusted it off, topped up the gas tank, and eventually got it fired up… and, as you might imagine, the answer came out pretty quickly as soon as we got the clues fed into the hopper. This is Match Group (MTCH), the owner of eponymous dating service Match.com as well as trendier products like Tinder and dozens of other social life apps and services.
And yes, David Gardner did recommend this just a few months after the IPO — he even teased it in his ads in the Spring, so yes, the stock is up 40% since they publicly hinted about this pick in April (we wrote about it and ID’d the stock here at the time, if you’re curious enough to double check).
I still don’t own MTCH
shares, in case you’re curious (thanks for asking!), but that first Fool buy in the Spring did turn out to be pretty well timed — the shares started trading right around $15 late in 2015, then fell by 40% or so in the February collapse and gradually recovered, so now at $16 and change they’re still pretty close to where they were at the IPO back in November.
What has caught MTCH a bit this year, and what got investors a little bit disenchanted with the shares, is that the earnings are expected to come in weaker in 2016 than they did in 2015… 73 cents for 2016 versus 84 cents last year, back when they were powering up (or perhaps puffing up) for that IPO. But if you have some faith in the analysts, things certainly don’t look bad for them — the dozen or so sell-side analysts who cover MTCH have an average guess of 93 cents per share for 2017 earnings, and they expect continued double-digit earnings growth in the years after that as well.
So the shares are changing hands right now for about 22 times current-year earnings estimates, and they’ve beaten those analyst estimates in all their publicly reported quarters so far — and the forward PE using next year’s estimates is just 17, which is lower than the forward PE for the S&P 500 (the broad market has a forward PE between 18-19 right now, a level that’s high enough to cause for concern for a lot of investors).
Which means, for me, that the stock comes in as “not unreasonable” on the valuation scale, and your assessment of the company’s merits as an investment will probably depend more on your expectations for growth potential in the online dating space, and on Match Group’s ability to keep their brands relevant and extract full value from their users.
Online dating has some intrinsic challenges as a business, mostly because these tend not to be perpetual memberships — people join when they’re looking for love and quit the services when they’ve either found what they were seeking or given up on that particular variety of the search. That makes it challenging to try to determine just how much a “user” is worth — and how much a company should be willing to spend in marketing to bring in each new user. Match Group has a lot of things working in their favor, particularly the fact that they operate so very many “socializing” sites and can therefore keep costs under control and “buy in bulk” when it comes to marketing and programming talent and whatever else they need to keep growing, but I don’t know what the long-term growth rate will be for online matchmaking.
If you’d like a general overview of the company and why Match Group thinks their brands and strategy are valuable, they have a general presentation on that here. The more detailed quarterly results presentation is here, and it essentially outlines the challenge and the opportunity for Match: Tinder is growing like crazy, as are their other Mobile apps, but Tinder doesn’t generate as much revenue per user as the traditional Match.com subscription, and costs have been rising as they’ve invested in Tinder expansion, so that’s generally why this is a “flat to down” year. They’ve also had some unexpected softness from other places, like OKCupid and Match Affinity, which seems like their competitor for the more intensive eHarmony questionnaire and personality-matching system — the two bright spots continue to be Tinder pretty much everywhere in the world, and Match.com in North America.
So… it is a nice collection of pretty strong brands, it’s not crazy expensive, and it’s not currently growing earnings but is growing their head count of paid members, and analysts think they’ll get earnings growth re-started. I remain undecided on this one, and I’d say it’s certainly more limited in potential scope than Amazon was in 1997 (though back then, we thought Amazon was just a bookstore… and Netflix used to be just a DVD delivery system, so who knows).
Match Group’s own assessment is that there are more than 500 million “singles” who have access to the internet, and about 10% of those are users of a Match Group Service… and about 10% ofthoseMatch Group users arepaidmembers. So there’s obviously room for growth if they can keep that marketing funnel going, bring new users on for Tinder and Match.com and other services, and figure out how to get more of those users to upgrade to paid memberships. I haven’t convinced myself that it’s exciting enough to rush out and buy shares, but there’s certainly potential.
With that, dear friends, I’ll leave you to your researchification — fancy a date with Match Group? Think it’s a bit too dodgy to commit to them just now? See some potential if it gets a shave and a new pair of shoes? Let us know with a comment below.