Oct 21, 2015 ยท 5 minutes

Ever notice how some Tinder profiles, intending to display the best photo first, end up putting them in chronological order? As you swipe along the profile pics to see more, the face seems to age before your eyes.

Many investors had a similar experience as they dug into the prospectus for the proposed IPO of IAC's dating holdings. Among those dating companies, of course, is Tinder – the youthful and most alluring of IAC's properties, equal parts social-dating app and reality-based mobile game. Not to mention a social phenomenon and emerging anthropological shift. 

IAC is like a bubble-gum machine on Wall Street, dispensing corporate confections in the form of buyouts and spinoffs, the latter including TripAdvisor, Live Nation, Expedia, and Lending Tree. IAC incubated Tinder inside its Hatch Labs and now owns all of it, leaving investors hopeful that Tinder would be spun off someday. And now that day is approaching.

The problem is that Tinder is being spun off along with 44 other dating properties (as well as, weirdly, The Princeton Review) as part of the Match Group IPO. So anyone who is keen to get in on the future of online dating is going to have to invest in the past of online dating as well.

The flagship dating site in the group is Match.com, founded 20 years ago and having signed up an aggregate 125 million members during that time. Match Group also includes OkCupid, Chemistry.com, OurTime and – pending the closing of an acquisition – Plenty of Fish. Dating services, though, have an even shorter shelf life than ordinary Internet startups. Accounts go rapidly inactive. If you want to impress a prospective date, it doesn't help to be too visible on a dating site whose time has passed.

Still, Match Group's 45 dating offerings had 59 million monthly active users in the most recent quarter, though only 8 percent were paying members. Unhelpfully, Match Group won't break down membership numbers by dating service, let alone whether they are growing or shrinking.

A look at the top US dating properties, measured by Google Trends, shows interest in Tinder rising over the past year or two while Match.com peaked six years ago, Plenty of Fish about four years ago and OKCupid last summer.

 

Here's another indicator. Match mentions in its prospectus that 68 percent of its new users this year have signed up through mobile devices. Tinder ranks number 60 among all apps in Apple's App Store, and as a top 10 app in the Lifestyle category. Including in-app purchases, Tinder is the top-grossing non-gaming app in the App Store. None of the other dating apps in the Match Group stable comes close. OkCupid's app and the Match.com app don't rank in the top 500, according to AppAnnie. 

Match Group has other dating brands focusing on Europe and other overseas markets, including Meetic and Twoo. As Match Group's chairman Greg Blatt said in IAC's last earnings call (where easily half of the questions concerned Tinder and Tinder alone), “Tinder actually has more paying subscribers outside of North America than inside of North America.” For every dollar Tinder makes in the US, it makes $2 overseas.

The problem is, Match Group's international revenue in the first six months of 2015 declined 6.6 percent from the year-ago period to $130 million, or 27 percent of the total. So if Tinder revenue is growing, and growing faster overseas than in the US, that means non-Tinder revenue outside the US must declining quickly.

In other words, Tinder may be cannibalizing other Match dating businesses as it grows, although it's hard to say for sure since the company discloses so little on each business. But as Blatt said in the IAC earnings call, “I think our businesses frankly compete with each other.”

Another possible red flag – Tinder's operating margin in the first half of 2015 fell to 14 percent from 23 percent a year earlier, largely because of a rise in the cost of revenue. The company gave two reasons for this. First, the Princeton Review is a higher-margin business than online dating (making it even more inexplicable why it's included in this IPO).

The second reason has to do with in-app purchases. When members pay for Match Group's subscriptions on the Web, it collects all of the revenue. But it has to pay Apple and Google a 30-percent share of membership fees through mobile. So more users may be joining through mobile, and Tinder may be bringing in a lot of new mobile revenue, but its growth will be a much lower-margin business than Match is used to.

Of all the risk factors in the prospectus, this one struck me as the most worrisome:

“As the distribution of our dating products through app stores increases, we may need to offset these increased app store fees by decreasing traditional marketing expenditures as a percentage of revenue, increasing user volume or monetization per user, or by engaging in other efforts to increase revenue or decrease costs generally, or our business, financial condition and results of operations could be adversely affected.”

Match Group executives have given a few more hints about Tinder in these earnings calls than they did in the prospectus. Monetization efforts began early this year and will be “choppy” for a while as new features are rolled out. Currently, the app includes some ads and charges fees for features like changing location and taking back swipes.

The company has also said that, while Tinder's monthly active users were growing by 200 percent earlier this year, the number of users who become members is growing much more slowly. Paid members for all dating properties in North America, for example, grew 11 percent in the first half of 2015, with non-Tinder memberships growing about 8 percent or 9 percent.

Overall, Match Group's total revenue grew by 5 percent in the first half of the year. Tinder's promise is that it could increase that rate, but this could take some time. Match says it will monetize the app slowly to keep from alienating users, similar to the approach of Facebook or Twitter before it. And when it does, Blatt has said, “the ability to monetize is going to be... probably a little lower than in a traditional dating product.”

The good news about Match Group is that the company has a long history of steady if slow revenue growth and years of profits. That alone makes it one of the stronger IPO candidates in a while. The risk is that, when Tinder does start to add to that growth, it will mean pressuring down profit margins. Which means for an IPO that has one of the hottest young apps in its portfolio, Match Group is looking an awful lot like a middle-aged company.