Bumble’s Loss Of Vision Makes It A Dating Market Outsider

 Key Takeaways

• The online dating market is declining as the post-COVID-19 Pandemic growth runs its course.
• Bumble’s stock performance has been abysmal despite the industry's and the broad market's growth after the IPO.
• I expect that Bumble’s loss of its key feature will negatively impact its further prospects, eroding the company to a fraction of the current price.
• I don't expect the company to file for Chapter 7 bankruptcy, but I expect a restructuring, privatization, or takeover to occur at a much lower valuation.

INDUSTRY’S CATALYSTS

Decline of Online Dating

• After the COVID-19 pandemic skewered the online dating market in 2020, the industry is losing appeal, as shown by Match Group’s results showing app downloads falling from 287 million in 2020 to 237 million in 2023. As a market leader, this firm shows a broad industry trend, which reflects growing dissatisfaction and questions about the effectiveness of this concept.
• A recent Forbes Health and OnePoll survey showed that 79% of Gen Z report being mentally and emotionally exhausted from dating app burnout. After a period of early success, I believe that dating apps – like many products in the modern age have been a subject of “Enshitification,” a concept that shows degrading quality of service over time as the focus shifts from providing users with the best possible experience to earning the most money possible. In dating apps, this translates into an effort to squeeze as much value from its users while creating the gamification of the user experience. Tinder’s introduction of the top subscription of $500 per month is an example of this trend.

Online app downloads 2019-2023, Source: SensorTower

• Dating apps belong to a rare product group where the improvement of the product results in worse user retention. The faster the user finds their “significant other,” the faster they stop using the product, creating a paradox where innovation and effectiveness undermine its business model. Success means losing two customers at a time. Another concept applicable to online dating is adverse selection, a situation where risks become so high that honest operators leave the market, resulting in even higher risks and a downward spiral.
• Dating app economies also highlight severe inequality. A study has shown that Tinder—the most popular app—has a Gini coefficient of 0.58, making it more unequal than most national economies worldwide. For men, the statistics are discouraging: only 0.87% of women respond positively to their matches, creating a frustrating and lopsided experience. Meanwhile, women face overwhelming attention, leading to decision fatigue, eventually creating an unhealthy environment with both sides being largely dissatisfied.

Industry Is A Monopoly

• The online dating industry is highly concentrated. Match Group dominates the market, controlling at least 50% of total revenues. The firm is known to grow through acquisitions, and over the years, it has acquired numerous businesses like OkCupid, Hinge, Plenty of Fish, and The League. In total, they operate 44 different businesses in the sector.
• The diversified portfolio is an advantageous approach in the industry, as it tries to cater to different user needs and capture value from the user based on factors such as race, religion, geographical niche, etc.
• Match Group previously tried to acquire Bumble for $450 million in 2017. However, even if the next bid occurs sometime in the future, I expect it to be much lower and just target some of the company's assets at a discount.

COMPANY CATALYSTS

Loss Of A Unique Selling Point

• Bumble’s unique selling point was the requirement that women message their match first. This feature allowed women to fully control who they interacted with.
• One of the new CEO's first major decisions was to remove this point, as management deemed it “a lot of work” for women. Instead, they replaced it with an option named “Opening Moves,” which allowed their matches to respond to predefined questions.
• The issue, however, lies in the company’s inability to moderate these responses, leaving women open to similar harassment encountered on other apps. Thus, Bumble now has no advantage over the Match.com family of apps, which has a far more diversified product base.

Lack Of Product Diversification

• Except for online dating, Bumble doesn’t have another successful product. The company tried launching Bumble BFF – a friendship-making service, and Bumble Bizz – a business connection service.
• However, both of these have been largely overlooked. Reddit users heavily criticized BFF and its users for predatory behavior, while the Bizz service was criticized for questionable practices. In particular, IndependentAustralia noted the presence of multi-level marketing (MLM) strategists who tried recruiting users into schemes mirroring pyramid schemes.

Weakening Financials, High Intangible Value And Lawsuit Pose Issues

• Bumble’s Q3 2024 revenue of $274 million reflects a 1% year-over-year decline, with further pressure from unfavorable foreign exchange fluctuations. Average Revenue Per Paying User (ARPPU) declined by 10% to $21.17, indicating a reduced willingness among users to pay for premium features. I believe that the rush for profitability created an overly complex product where everything is paywalled – including Premium membership, Boost option, Super Swipes, Compliments, and Spotlights. I believe the decline results from increasing competition in the sector and potential dissatisfaction among paying users, threatening Bumble's ability to sustain growth.
• Bumble’s goodwill stands at $1.5 billion, with intangible assets valued at $1.4 billion, far exceeding its current market cap of $1.26 billion. This imbalance raises questions about whether the company’s perceived value is artificially inflated. Furthermore, Bumble carries a long-term debt of $613 million, posing a significant financial burden as interest rates rise and market conditions remain volatile. This reliance on intangibles leaves Bumble in a precarious position, vulnerable to write-downs that could severely impact its valuation.

• As of November 2024, the class action securities lawsuit argues that the management provided “overwhelmingly positive statements to investors while, at the same time, disseminating materially false and misleading statements and/or concealing material adverse facts concerning Bumble's relaunch strategy.” While the terms are unknown, this lawsuit poses an additional risk to the company’s financials.

Stock-based Compensation Is High, While Insider Ownership Is Low

• Bumble has relied on stock-based compensation (SBC), giving its employees over $100 million by the end of the last three years. The first problem with SBC is dilution, as issuing new shares undermines the value of existing shares. However, as the company loses market cap, this compensation (typically under a lock-up for a certain time) loses value. This risk is unattractive to senior management, whose total compensation package typically consists of significant SBC. Thus, a further risk is attracting and retaining top-level talent.
• When Bumble’s parent company (MagicLab) was sold to The Blackstone Group, Whitney Herd became CEO of the enterprise with a stake of approximately 19%. As of December 2024, she held ownership of just 0.61%, or 654,000 shares, worth $8.1 million at the current stock price. Meanwhile, available data indicated her compensation package as an executive chair at $7.03 million. CFO Anuradha Subramanian (who recently resigned) held just 48,200 shares worth $600k while receiving yearly compensation of $3.74 million. This trend indicates that insiders have low conviction in the stock.

RISKS (To my thesis)

Bumble's Turnaround

• Bumble could reinvent itself. Although problematic, adverse selection in a dating market is a solvable problem, which one service (OkCupid) has previously solved. They used extensive questionnaires with a pondering system, cross-matching not only what people say about themselves but also what they find attractive in their partner.

• Bumble has two main things going for it. It is independent of Match Group and has about 50 million users (in 2023), which is enough of a user base to utilize for such an extensive turnaround. Things would likely worsen financially before getting better, but executing a differentiating product on a large scale would be one way to stand above their competition.

Renewed Surge In Online Dating

• When the COVID-19 Pandemic hit, online dating surged. Isolation and shutdowns caused people to do everything online – even dating, which rose to record levels.
• The rising tide could lift all the boats once again. Although another Pandemic is unlikely to occur, advancements in technology, including AI and VR, could reverse the decline and spur another period of high growth.

Privatization

• As Bumble's market cap declines, it is possible that it will go private. It is possible that it will receive a bid and go private. While shorting the company through stocks or options isn't a part of this narrative, such action represents a risk for long-short portfolios.
• In such a scenario, the share price would likely immediately rip higher, squeezing the shorts that hold about 13% of the float. However, a meme-stock short-squeeze scenario is unlikely.

ASSUMPTIONS

• I expect the online dating industry to lose popularity owing to user fatigue and an inflexible, gamified business model that emphasizes squeezing revenues out of the user base.
• I expect Bumble to fare worse than the rest because it has drifted away from its unique selling point, which has given women (more valuable users) more control over their experiences on the platform.
• Despite Bumble not being under Match Group's monopoly, I don't expect the company to rebrand itself and find new differentiating factors. I expect the company to continue on the existing trajectory, partially owing to its lack of vision and inability to attract the best talent as SBC drops in attractiveness.
• I don't expect the company to file for Chapter 7 bankruptcy. Still, I could see significant impairments on its balance sheet due to declining intangible value and an eventual sale of assets in pieces for cents on the dollar under current value.

VALUATION

• This narrative is different as it resembles a scenario where I expect the company to fail.
• The current data forecasts annual earnings growth of over 100%, while the industry growth is just 12.2%. The company is unprofitable, with a negative net profit margin, while the broad market sits at all-time highs and the unemployment rate in the US has bottomed, triggering the Sahm rule.
• I believe that the company will eventually go through one of the three scenarios: Chapter 11 bankruptcy, acquisition by Match Group, or that it will be taken private.
• I'd expect both of the latter to happen at a fraction of the company's current market cap ($1.3 billion), possibly below $300 million, but heavily depending on the broad market conditions at that time.