How is Spark Networks adapting? (NASDAQ:LOV)

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Introduction and thesis

No one has a monopoly on romance. Digital dating in many different forms. Bumblebee (BMBL) achieved 100 million users in 2020 and Grindr achieved 13M. Some even meet by no social media dating platforms like Instagram (Facebook) or Snapchat (INSTANTANEOUS). Even Facebook is launching its own dating section through the Facebook platform itself. Hinge is another online dating platform that required users to log in through Facebook. In 2018, Hinge decided to stand alone & abandoned Facebook’s requirement as its popularity grew.

Digital dating is a cluttered space. Match Group (MTCH) has a proven track record. Match runs multiple platforms, including Plenty of Fish and the hugely popular Tinder. Match is constantly increasing its sales and is profitable. Match is not in my portfolio, but I would consider it for the right price.

spark networks match lov spark networks stock vs match

Tinder (Tinder.com)

Then there’s Spark Networks (NASDAQ:LOV). A brief inspection of the digital dating landscape clearly puts Spark Networks at the back of the pack. It has the worst numbers, the worst business model and is somehow contracting in an industry that has huge tailwinds. If you gave me free Spark stock today, I would sell it tomorrow.

Spark Networks is limiting its customer base in an already competitive industry. The business model is designed to limit its scalability. The company doesn’t accidentally block people from using its products, it does it on purpose. This places an extremely low ceiling on his future earning power.

The company: Spark Networks

In short, Spark Networks operates online dating sites – 12 to be exact. It makes me bearish before I even get into finance or competition. At first glance, this may seem like an asset. The more sites, the more customers.

sparknetworks stock vs match.com stock spark networks jdate stock

Spark.net

But that doesn’t apply to a company whose trump card for customers is the Networking effect. In short, it simply means that the value of the entire business is based on the number of people using that business at any given time. In other words, the large number of customers on Amazon (AMZN) attracts sellers to the platform and vice versa. The large number of Uber (UBER) drivers attracts customers to the platform, and vice versa.

Spark Networks is limiting its customer base in an already competitive industry. The business model is designed to limit its scalability. The company doesn’t accidentally block people from using its products, it does it on purpose. This places an extremely low ceiling on his future earning power.

Spark Networks separates romantics from each other. The reason is obvious: specialization. Christian Mingle is for Christians who are deep in their faith, as is J-Date for those who want to sing the Horah at their wedding.

spark network stock jdate stock match networks

Jdate.com

Spark has 2 major flaws in its business model. First: Spark’s business model works against the previously mentioned networking effect. Instead of x people on 1 site in an area, you now have x/12. Second, there is nothing exclusive about the online dating specialization. The company’s competitors can easily make their own platforms more specialized if they wish.

Insiders and big investors have mixed opinions

At the end year, director Joseph Whitters racked up $320,000 worth of stock on the open market, and director Brad Goldberg bought $35,000. CEO Eric Eichmann bought $47,000, and CFO David Clark picked up $10,000. Although these are small amounts of stock, the market cap is only $48 million at the time of this writing. Ancient Board member John Lewis bought $250,000 worth of stock in June last year. This purchase is down 63% on paper and has not been resold to date.

Last year’s largest sale was by Canaan VIII LP, which is operated by Canaan Partners. Canaan has unloaded over $1.4 million in stock over the past 12 months. This float was then offset some with over $5 million worth of stock purchased by Osmium Partners, which is managed by the previously mentioned John Lewis. Mr. Lewis seems to be in love with LOV.

The company: Match Group

Designed in 1993, Match was spear in 1995. In 2004, it was the largest dating site in the world.

Like Spark, Match also has multiple platforms, but it works differently than Spark and much more efficiently. Match owns Tinder, OkCupid, Plenty of Fish, Hinge, among others. The main difference between the models of many Match platforms is inclusive whereas Spark’s sites mostly operate on an exclusive basis.

Article Mtch vs love

PlentyOfFish.com

To clarify, if one goes to Tinder, there’s nothing stopping them from also going to Plenty of Fish (POF for short) or any of the other platforms. One can go on Tinder “in addition to” Match.com or any other subsidiary. On the contrary, if you are in J-date, you go in J-date” instead of “Christian Mingle. Match’s inclusiveness is a big plus. Just as one would want an app with a large collection of carpool drivers, one would also want a dating site with options.

Tinder picture for Lov vs Match

Tinder.com

Match collects revenue through premium subscriptions and ad revenue. Management believes there are many more benefits to come. According to the transcripts, only a percentage of “little to mid-teen” users pay for premium subscriptions. Match is also expanding internationally. The graph below shows the international growth for the last 5 quarters. Spark Networks did not provide any information on international growth.

Trimester Americas Europe APAC
Q1 2022 16% 14% 38%
Q4 2021 ten% ten% 36%
Q3 2021 11% 13% 36%
Q2 2021 16% 13% 17%
Q1 2021 24% 15% 15%

For Match, there was no initiated purchases in the past year and there have been no exercises of options leading to purchases. Director Joseph Levin has led a fire sale with more than $54 million of company stock sold in the past 12 months. This is not a new trend as Mr. Levin sold $84 million in shares in 2020.

So how does Spark fit?

(Pun intended)

For starters, Match has $827 million in cash since its last report. It also has consistent revenue growth and reasonably stable operating margins. During the pandemic, the company continued to increase quarterly sales and operating income. Match has the resources and ability to expand globally through growth and acquisition. As shown in the graph above, Match grew by 38% in the Asia-Pacific region. Tinder is also the #1 dating app worldwide in number of downloads.

Spark Networks is not a company to fall in love with. The company has recorded a loss of net income in 9 of its last 10 quarters. The only quarter it made a profit was $800,000, or less than 1.5% net margin. Match also wows Spark with its gross margins and sales growth. This, combined with the lack of use of the network effect, severely limits the company’s long-term prospects. In my opinion, any growth for Spark Networks will be more due to the growth of online dating and less due to the company itself.

Match vs Spark Networks which is a better investment

Looking for Alpha

Margins for Match Spark Lov

Looking for Alpha

Match Sales Growth Drive Sales Growth

Looking for Alpha

Of course, there is always the possibility of a takeover by a bigger player in the online dating industry. With a single-digit forward P/E, Spark Networks may seem like a contender for this opportunity. The stock price has risen recently and such a low valuation may be attractive to some. But I’m not interested in whether this company is a takeover candidate or a value trap.

I would be much more comfortable with a profitable business with no history of losses and exclusion like Match. I view Match as a holdback due to the fact that no one company has a monopoly or a big moat in online dating. If Match were to drop a little more, I might nibble and start adding it slowly for the long term outlook.

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