about 3 years ago • 4 mins
Dating app Bumble listed shares on America’s tech-heavy Nasdaq stock exchange last week – and just like the perfect pickup line, the company’s timing couldn’t be better. A red-hot market for such initial public offerings (IPOs) has seen fresh stocks from the likes of Airbnb surge in recent weeks. But while the price of Bumble’s newly listed shares popped 64% on their Thursday debut, how likely is it that they’ll continue to climb?
Launched in 2014 by a former executive at Match Group-owned Tinder, Bumble’s flagship app offers an alternative dating dynamic: only women can make the first move. The business has since incorporated introductions to both new friends (Bumble BFF) and business contacts (Bumble Bizz).
After being acquired by private equity giant Blackstone in late 2019, Bumble and sister app Badoo expanded to serve more than 40 million monthly users in 150 countries around the globe – second only to Tinder’s 60 million-odd. Those numbers are important because in the online dating business, the key to success is scale. Thanks to the phenomenon known as “network effects”, more people on an app enhance the experience for everyone – ultimately encouraging others still to join.
Bumble’s popular, sure – but after the dating app’s strong start to life on the stock market, is it worth investing in at the price? Let’s examine both the bull and bear cases.
Bumble’s revenue rose 36% in 2019, and while that figure was only 15% for the first nine months of 2020, the company managed to increase its average revenue per paying user. Online dating overall should continue to boom: according to Bumble’s IPO prospectus, the freemium segment is projected to grow at an annual average rate of 18% across the next four years. The company will hope to turn lots of these newbies – particularly in nascent international markets – into paying customers.
✅ Competitive advantage
Bumble’s women-first feature helps set it apart in a crowded market. Its popularity is premised on the simple idea is that women will go where they feel comfortable and empowered – and that men (as well as other women) will follow.
✅ Changing norms
Online dating has been one of the only ways for people to make new connections during coronavirus lockdowns. We’re not done with the pandemic just yet – and digital dating’s increased popularity is likely to be permanent anyway.
✅ Potential upside beyond dating
While it’s hard to imagine Bumble Bizz dethroning Microsoft-owned LinkedIn anytime soon, Bumble’s friend-making feature could well represent a long-term growth opportunity. According to Bloomberg, Bumble BFF’s monthly users accounted for 9% of the company’s total in September. Positive growth for Match Group’s rival friendship app Ablo also suggests an as-yet unsated appetite for platonic connection-making.
With a market value of around 20x this year’s forecasted sales, Bumble isn’t cheap – either on a standalone basis or compared to Match Group, which trades at 16x sales. Remember, Bumble has fewer users – and made a loss in the first nine months of a lockdown-plagued 2020. Match Group, meanwhile, has been consistently profitable for ten years.
❎ Threat from new entrants
Online dating is a competitive game, featuring a constant influx of flashy newcomers – often with hard-to-match regional attractions. On the other end of the scale, Facebook Dating could see the social network exploit its significant financial resources to expand more quickly around the world than Bumble.
❎ Pressure to convert
Related to the above, not everyone wants to pay for introduction apps – and Bumble’s finances are largely dependent on its ability to convert free users into paying subscribers. People may prefer to use several services, making it less likely they’ll commit to one paid account. And of course, Bumble could be a victim of its own success: if you do find love, then you’ll close the app.
❎ IPO risk
Importantly, investing in IPOs favors big institutional investors who can buy shares before trading even starts, allowing them to profit from any initial pop. Everyday retail investors can only get in afterwards – and history shows that by then it may already be too late. In spite of what may seem to be short-term success, most IPO stocks fall beneath their starting price after five years.
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