Match Group (NASDAQ:MTCH) reported higher revenue and profit in the third quarter that beat Wall Street’s expectations, but investors were disappointed with its fourth-quarter forecast as legal challenges, mounting competition, and a looming spinoff from its parent will make it more difficult to grow as it has.
The owner of online dating apps such as Tinder and OkCupid reported revenue of $541.5 million, up 24% in currency-adjusted sales and higher than the consensus $539 million consensus on Wall Street, while earnings of $0.51 per share easily outpaced the $0.47 analysts were looking for.
But Match also said revenue would grow to only $545 million to $555 million in the fourth quarter — below the $560 million it was expected to guide toward — and mounting legal bills and international expansion will also hold back adjusted EBITDA to a range of $205 million to $210 million.
A tinderbox of concern
By all accounts, Match’s flagship Tinder service is still performing at exemplary levels, with sales jumping 49% year over year and the number of users using the service in any particular week rising 30%. User retention is running at about 85%.
Yet there are signs growth may be slowing. Tinder added 437,000 paying subscribers in the third quarter, reaching 5.7 million, but that’s down from the 503,000 it added in the second.
It’s unknown whether that has anything to do with the publicity surrounding the lawsuit and investigations the Federal Trade Commission and the Justice Department launched against Match’s namesake service, for allowing fake accounts to be used to get users to pay for the service.
Last year, Tinder’s co-founders and eight other people sued Match over claims of fraudulently devaluing the service to deny them their fair value from the company, and they’re seeking $2 billion in compensation. An appeals court dismissed Match’s attempt to have the suit dismissed.
All of the extra legal expenses will eat into Match Group’s profits and are partially responsible for the lowered outlook it gave.
Facing competition on its own
Competition will also be heating up now that Facebook (NASDAQ:FB) has launched its own Dating service, while Bumble is also challenging Match’s overseas expansion by releasing a service in India. OkCupid says it’s showing “massive growth” in India, with 1.4 million app downloads, but a new rival may slow that trajectory.
Although Match didn’t update analysts on parent IAC‘s (NASDAQ:IAC) plans for spinning off the dating service, that is a significant headwind coming.
The entertainment services company wants to saddle Match with $1.7 billion worth of debt following the transaction, double the $1.6 billion it now carries, while tacking on additional amounts to pay IAC and other investors a special dividend.
Investor love may be lacking
Match Group’s third quarter may have been stronger than many expected. Average revenue per user, for example, increased by 4% in the quarter compared with 2% last quarter, which was seen as a worrisome degradation. And Tinder does seem as strong as ever, if not more so, even with the addition of fewer users.
Yet the dating service is about to enter some choppy waters in the months ahead, and legal challenges can drag on for years. With new competition in the U.S. and globally, investors might be right to be concerned that headwinds will force the dating app to swipe left on growth for the immediate future.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Match Group. The Motley Fool has a disclosure policy.