Chit Chat Stocks - Grindr (Ticker: GRND) Not So Deep Dive

Episode Date: March 21, 2023

Grindr Inc. (GRND) operates the popular dating app for LGBTQ+ individuals, and has experienced a surge in user engagement amid the pandemic, but the company faces stiff competition and growing concerns over data privacy and security in a highly competitive and crowded market. At the end of the month, we will publish an Arch Capital episode that will cover the company: Match Group. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Grindr. Enjoy the show! ****************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (3:00) Industry | (12:40) Management & Ownership | (15:58) Earnings | (20:51) Balance Sheet | (24:46) Valuation | (27:50) Our Analysis | (28:55) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome into Chit Chat Money. My name is Brett Schaefer, and I'm joined by my co-host, Ryan Henderson. Today is our Tuesday not-so-deep-dive episode where we analyze

one stock by covering its business model, ownership, financials, future growth opportunities, and much more. After listening to this episode, we hope you get a better perspective on the company that you're potentially investing in, whether it is long or you never know, could be a short as well. Today, we are covering Grindr to continue our online dating theme. Last week, we covered Bumble. Next week, we're going to be covering Spark Networks. And the week after, we are going to be covering Match Group. But first, today's episode is presented by Stratosphere, the best web-based research terminal for company-specific metrics like KPIs and segment revenues. Ditch the clunky old, how would you call it, home screens for your investing life, your watch lists,

your research like Yahoo Finance, and upgrade to something way better and cleaner like Stratosphere. dot IO. They have company specific metrics like KPIs and segment revenues. If you're watching this on either Spotify or YouTube, you can see that Ryan has loaded up the Silicon Valley Bank one, which I guess RIP, but they have tons of specific stuff you can look at over time. You can look at that soaring deposit base that decided to all leave at the last minute, but they have clean data, segment data that is triple checked for accuracy and beautiful data visualizations as any watchers can see Ryan is looking at right now. And it can really save you time and frustration digging through SEC filings. They save us hours

and hours of research time each month. And we use it as our investing home screen. And you can try it out for free by going to stratosphere.io, that is stratosphere.io, or upgrade to one of their paid plans for 15% off using code CCM. Okay, Ryan, we're talking Grindr this week. Really new company. So I'm going to say we can't look at much of their historical financials. Unfortunately, utilizing the beautiful charts over at Stratosphere is not going to be helpful for a company that's been public for only a few months. But why don't you talk about Grindr, what they do, and the history of the stock slash business? All right. Yeah. And so, as Brett mentioned, they just went public. There are some, I guess, gaps in our research today. You could maybe say there isn't a proxy statement that's public yet, unless I'm mistaken. Am I correct in that?

let me unmute myself i think you are correct because yeah i actually i did this i i filtered in through all their scc filings and did the filter for proxy statement for each of the last three years and there wasn't any so i would look for that i'm going to talk about that during management and ownership section but look for the annual report and proxy statement to come out sometime this spring yeah and that's the other part i had to literally uh like it's such a burden for me. I had to email Investor Relations to figure out what the share count was. So we'll talk about that in a little bit. Let's, I guess, get down to what the business is. Grindr is the world's largest online dating platform focused on the LGBTQ community.

I'm not sure if it's larger. I'm not sure if their LGBTQ presence is larger than Tinder's because some of the more traditional dating apps like Tinder, Hinge, Bumble, they appeal to the LGBTQ community as well. But Grindr is the only one that's explicitly or specifically targeting that group. As of the most recent quarter, the platform was home to more than 12 million monthly active users. That's about the same size as Bumble when they came public. And when I say Bumble, I'm excluding Badoo. I'm talking about just the Bumble app.

When they went public, they had about 12 million monthly active users as well. Only 873,000 paying users, though. The CEO kind of talked about this in some interviews. They didn't really roll out the true monetization efforts until about three to four years ago. And so the number of active users that are paying users has continued to grow over time. And anyway, Grindr is pretty similar to most dating apps in that users can create a profile for free. They can access the platform on a limited basis. A lot of the, like, mechanically, I guess, the apps function in a similar way.

However, there are also some nuances that make them a little bit different in terms of, like, user interface. So you think about like Tinder, Bumble, Hinge, those are mostly, the homepage is basically like a single file line where accounts come up, you swipe one way or the other, then the next account pops up. uh, Grindr has a different kind of layout. It's a grid based layout. So your homepage is just 100 different profiles, um, that you can like scroll through view. Um, you can like that kind of thing and it's very geographic focused. So there's another part of the homepage where you can literally see like, uh, it's a map where you can see other accounts and you can also move your profile to different parts of a city. It's very popular in cities. And so I guess the only other one, there's another part of the homepage, which is called

the fresh page, which is just users that created an account within the last 72 hours. And then the other part, and some of the apps might have this as well, but Grindr allows you to filter your searches by basically kind of hyper filter them where you could choose like body type height um weight intentions that kind of thing whereas some some other dating apps don't really have that uh ability but as for the monetization side of things um the there's really basically make money through subscriptions, but they also have advertising. So they break it out as direct revenue and indirect revenue. I'll start with indirect revenue. Grindr sells ad space across its app, both to advertising service providers, so supply-side platforms, demand-side platforms,

that kind of thing, ad exchanges, and then also just directly to advertisers. This currently accounts for 16% of revenue, but it's not really growing. And I expect that it'll shrink as a percentage of the overall top line over time as they roll out kind of newer monetization features. Also, if you're thinking about trying to scale up a dating app, advertising is a good way to not prohibit user growth. So it allows people to use the platform completely without having to prohibit them in any way. So it's a good way to make money if you're the company while still kind of hyperscaling on the user side. But on the direct revenue side, which makes up the most of the business, it's similar to other services. They sell subscriptions. They have one, as far

as I can tell, just one a la carte offering that's there as well, which is called Boost. There might be some other ones as well. But most of the revenue comes from two subscriptions, grinder extra and grinder unlimited prices vary based on how long you purchase the subscriptions for so if it's one month um the grinder extra is 10 bucks the unlimited is 25 bucks but you can do like discounted pricing if you do three months six months one year that kind of thing but with extra you get no ads so it's an ad-free experience you get access to five times more profiles which is kind of one of the, probably the biggest value propositions because you only get access to a hundred profiles on a day with, with your sort of free account, but you can get

basically 600 profiles. If you subscribe to extra, you can also search by additional features or filters. So height and weight, you can only use if you have extra, or you can only filter with there's, there's a bit more as well, but then unlimited, you can also I should say, you can see who views your profile. Actually, that's on the unlimited side, but basically it's a bunch of different plans that allow you these additional features, which if you know you're going to be on here and use this service and you're kind of like a user that's on here a lot, it makes sense to get one of these. So on the unlimited side, you get access to unlimited amount of profiles. You can

see who has viewed your account, which is kind of similar to Tinder's see who likes you account or see who likes you thing. And then you can also explore an incognito mode. You can unsend messages. Basically, you just get all these additional benefits. But that's the basics of the business. I hope I covered it pretty well. It's pretty similar to Tinder, I'd say, just user interface is slightly different. But as for the history, Grindr was created as a mobile app in 2009 by an Israeli entrepreneur named Joel Simkay. From what I can tell, the platform has had basically all the same features that it still has today. And it saw robust adoption right from the start. So keep in mind that was when the iPhone basically had just launched. They were one

of the first LGBTQ focused dating apps, probably the first to launch on iOS. The app won a bunch of awards. They got cited in a lot of blogs and that really kind of just continued to drive growth. They did not raise any money with venture capital. So as they say in private markets, they bootstrapped their way for like the first seven years. It wasn't until 2016 that Grindr just sold 60% of the business to a Chinese mobile gaming and social networking company called the Kunlun Group for $93 million. Two years later, they sold the remaining 40% to the Kunlun Group for another $152 million. So prior to this IPO or this SPAC, I should say, they were owned by a Chinese mobile gaming business. Kunlun Group had the intention to take the business public via an

IPO, but after the Committee on Foreign Investments in the United States, CFIUS, determined that having a Chinese owner run Grindr was a national security risk, they derailed their plans and they started looking for a buyer in the US, so someone to sell it to. This ultimately led to them going public via a SPAC in November of last year. So it's only been four or five months now since they've come public. Important to note though, the SPAC did not actually generate any proceeds for the company. It only gave the existing shareholders a way to sell. So here's a quote from the last one. It said, all of the shares of common stock and warrants offered by the selling security holders pursuant to this prospectus will be

sold by the selling security holders for their respective accounts. We will not receive any of the proceeds from these sales. For one, this was late to the SPAC bonanza that was going on, but i just absolutely hate this transaction yeah i guess we're going to discuss that later let me let me hit industry and competition landscape as with our other episodes for online dating the industry and competition is pretty simple to understand so from our last episode we estimated just given the size of match group given the revenue generation of bumble on a consolidated basis adding in grinder and then you know adding in some of those smaller dating apps as well we we kind of estimated the market to be around $5 billion in global annual spending. Now,

some definitions might have that higher, some definitions might have that lower, but we think that's a good estimate. Looking at Grindr's revenue, they equate to around 4% of this annual spend. And the behemoth in the room is going to be Match Group with over $3 billion in annual revenue. Now, if we look at competitors, again, this is going to sound a lot like the other episodes, but just switching some other people out. There are two groups I would put the competitors in first are what we would describe as the generalized dating apps, which the big three nowadays are Hinge, Tinder, and Bumble. And then if we look at legacy ones for the older populations, maybe OkCupid, Match.com, some of the others I'm forgetting. They don't cater

exclusively to the LGBTQ community, but have services for them. They don't exclude them as to be all, why would they do that? And then second, there are the LGBTQ focused dating apps like Hornet, Gaystrist. I don't know how to pronounce that, but that's according to the blog I read, that's one of the more popular ones. And then many others. There's actually a ton of other of these smaller ones, but as of this writing, Grindr really has separated itself from the pack of the specialized LGBTQ dating apps or hookup apps or however you want to describe it. If we look at the iOS rankings in the United States for top-grossing overall applications, Grindr is 51st.

And for reference, Tinder is 5, Bumble is 8, and Hinged is 14. The other LGBTQ-focused apps are nowhere to be found in these rankings. So Grindr has really separated itself as the big winner in this category, in this niche. And then lastly, according to management and a lot of industry surveys, approximately 65% of homosexual males meet online which is higher than the overall population and most likely the most online of the online dating demographics if that makes sense i don't follow the last part the most the most people meet online of any sort of demographic would be right right if that makes yeah it's more yeah i remember there was that research that came out it was like a study from

i think uh stanford uh some stanford uh group that came out in 2017 everyone loves to cite that because online dating was like the number one way people met and then you take a look at that that was only for heterosexuals and it was like 39 and i think yeah as you mentioned homosexuals was 65 which is really kind of an astounding number yeah and the and it's gonna be hard today and And I think the big takeaway is that this demographic, especially the younger demographic within, we could say homosexual males, but maybe expanded to the LGBTQ community is more online for their online dating, or excuse me, they're more online for their dating compared to the population at large.

Now, if we look at management and ownership, the current CEO of Grindr is George Arison. He joined the company in late 2022, around the time I was preparing to go public. This new executive team really came on along with the SPAC. I think they, looking at any sort of the proxy-esque materials I saw from their S-1 filing, they did not talk at all about the old Chinese investors. They're kind of out of the picture now. And I think they probably had to be because of that foreign investment concern, which for some, I don't know why that was a national security concern, but I guess they had to deal with that. That's more of a topic for another day. It didn't make much sense to me why that's the big thing the Foreign Investment Committee

is focusing on, but it seems a bit less serious than something like semiconductors or defense weapons. But moving on, as a part of joining the company, Arison received a five-year restricted stock unit plan worth $44 million at the time of the S-1 filing. This was paid to him or given out to him in late 2022. And now, again, that's not paid all in one year because $44 million in one year for the size of a company would be absurdly large. But over a five-year period, it's a little bit more manageable, but still quite large. I would expect this plan to continue diluting shareholders

in the years ahead because versus how many shares are outstanding versus how many he's going to get, it's quite a lot. Now, if we look at other executive compensation, we're still getting some feelers out here because we need a few years as a public company to see what their philosophy is and how it changes is going from the private markets. But one thing I saw in the S1 is that Arison gets extra RSUs, and I think the CFO does as well, if Grindr hits market capitalization hurdles, where the first one for reference is about $5 billion, and then it goes higher from there. I think that was a red flag because Arison is now heavily incentivized to make Grindr bigger, but not necessarily to increase per share value, where market cap is not really the best metric to

hit, especially when you're going to get stock-based compensation on that, because that just means if you dilute to high heaven, well, then you'll hit that market capitalization goal, but the shareholders might not be in a better spot. However, not a huge deal, not a giant red flag. Maybe it was more of a yellow flag. We look at base salaries, nothing unique, everything very standard. I didn't see any huge stuff, but again, watch out for the next few years as this company has more experience as a public company. For ownership, like Ryan mentioned, we are a bit of the dark here. I'm at risk of getting something wrong. Some things might change really quickly, sort of similar to the Bumble situation where Blackstone and Whitney Wolford

started selling a lot recently and all those concerns we had might actually be out the window soon. But again, the SPAC filing, and I would say as a note, with these SPACs and with these deals, we typically wait at least for audited annual reports and the proxy filings to come out before investing, and most likely one to two years on the public markets. Lastly, though, and you can check out the ownership table within the newsletter. I'll have all the stuff in there. I don't need to read it out for the listeners, but the ownership table as updated on January 6th, 2023, over 80% of the company is now owned by non-executive directors, and around 50% just under it is owned by, well, list Raymond Zage III, but that's really Tyga Investments,

which is a funny name because of the rapper Tyga, but it's pronounced T-I-G-A Investments, and that's the SPAC person that took, or the SPAC company that took, however you want to call it, took ownership of this thing and brought it to the public markets. Anything else you saw, Ryan, on the management and ownership thing to add on here? The Taiga Investments' ownership is a risk because of the potential to sell.

And maybe he has been selling. And it was like the whole SPAC transaction was incredibly complicated. Yeah, it's one of those where it's so complicated. They did a really poor job explaining it. It felt like it was very much

intentional, too. like they avoided they added complexity just so people wouldn't understand that's what I'd add on is the when it's so complex like that I get worried because

yes you can kind of read through the stuff write it down and say okay this means this this means that I'll connect all the dots here but you have a when it's a complicated SPAC deal like this or not even a SPAC deal just a complicated deal in general there is a higher risk you're missing something and there's a higher risk that they're hiding something from you, I think that

risk is quite high with this company. But continue, Ryan. Yeah, I'll go through the earnings. I mean, as for the business, it's pretty solid. Or I guess the product, I should say, it's very profitable. $195 million in revenue is growing 34% year-over-year. They have 74% gross margins. like most of these businesses, the largest cost of revenue for them is just paying out fees to the app stores. $45 million in free cash flow, so about 23% free cash flow margins. They do pay out a good amount in SBC, but even if you backed out all the stock-based compensation, they're still free cash flow positive. They do, however, report a 44% adjusted EBITDA margin. Now, typically, I'd throw that to the wind. It doesn't matter, but they are pretty indebted. And so if you're

a lender, this is a number that you're looking at because you don't care about stock-based compensation. You don't care about dilution. You care about the cash that the business is generating before they can pay back your debt and your interest expenses. So they're basically break even on a gap profitability basis or net earnings. But the difference there, the lion's share of the difference is interest expenses and stock-based compensation. So I would just basically pay attention to free cash flow. As for more qualitative metrics, 12 million MAUs in 2022, that's what they ended with. I think I already mentioned that. 873,000 paying users at the end of 2022, that was growing 22% year over year. So really strong growth in payers.

And then 6.9% of overall users are paying users. Last year it was only 6.1%. However, I will say that is lower and I think significantly lower than a lot of other dating apps. Bumble is much higher. Hinge and Tinder, I both believe are higher. They're around the mid-teens percentage, although it's not a number that's given out every quarter. Other number, average revenue per payer or per paying user was growing 7% every year. It's solid. I would imagine it's around where Tinder average revenue prepares at. However, they're in the process of rolling out a la carte new forms of a la carte transactions or a la carte features, which will probably reduce the average revenue per payer while increasing the payer because the barriers to entry there are

lower. Yeah. Yeah. I would say two notes on the earnings. One, they have the SPAC and public market fees that get added on whenever someone does an IPO, whenever someone goes to the public markets that are going to have the one-time expenses this year. So that adjusted EBITDA number is a bit more relevant than we usually like to give it credit for, like Ryan mentioned. But over the long term, yes, we are looking at free cash flow and then also tracking stock-based compensation. And then secondly, on that average revenue per payer or paying user, a lot of the dating app companies tout this number, but I think it's not in my top five most important number for looking at these companies because you can optimize for higher

or lower ARPU really easily. You could drop it down to 10. You could bump it up to 40 if you really wanted to. It's all about MAUs and revenue, I think. Or your active users plus the revenue you're able to get out of them. Because again, that ARPU is not too relevant. You can juice it up as high as you really want to.

I mean, you could make the only subscription $80 a month and your repairs would drop through the floor. but your average revenue per paying user would be $80 a month. So yeah, you can kind of massage that number as you want. I don't think it's that important. But let's talk balance sheet. $9 million in cash. Running lights, running lights.

Yeah, I saw that. It was shocking to see that when they had just done a SPAC and then I realized, oh, this was one of those. It was like Dutch Bros. Yeah, it was one of those SPACs where they trick you into thinking that they're raising money when they're actually not. Yeah, this was not a liquidity event. Anyway, $85 million in annual adjusted EBITDA. So when you're looking at the debt, just kind of keep that in mind. Liabilities, $361 million in total debt. So you compare that. If there was anything that hindered their ability to generate cash, that is a problem because they don't keep a lot of cash in the balance sheet. $195 million of that debt is in a variable rate credit agreement. And the effective interest rate

on that was above 10% as the last report. I can't tell where the remainder of the debt comes from because on the S-1, all they reported was this $195 million credit agreement. But on the most recent report, they said we have $360 million in total debt. So maybe this came as a part of the transaction or maybe debt was raised in between, my guess is that it's probably a similar interest rate because the interest expense for the full year, 2022, was $32 million. That's basically 9% of total debt outstanding. Well, maybe even higher because they didn't have that debt for the full year. Yeah, it's possible. You're kind of in the dark right now, which I know it's unfortunate timing on our part to record this. And the other thing is like, people are probably

thinking, why haven't they published a 10K? I know a lot of companies, I was reading that a lot of companies go public on the third quarter because then they have like the delayed filing for the 10K when you file for a delay or whatever, you can take longer than the delay for a quarterly filing. So they've got like, I think still have some time before they have to publish their 10K. But yeah, I mean, I guess the things I would look at, go to the proxy, try to determine what the ownership is, who's still involved, because that could provide some selling risks. Go to the 10K once it's released, if you're interested in investing in this business, and look at the interest expense on their debt. It should be easily laid out. It was not easily laid out in the S1. It was very frustrating. But just in terms of the overall indebtedness, $352 million in net debt, like I said, adjusted EBITDA is $85 million. So basically debt to EBITDA four times. A lot of their cash flow is going to be going to interest expense. And if rates are rising, an increasing amount are going to be going to interest expense. So just be cognizant of that and really value this on an EV basis, not necessarily just the market cap. Yep. And that leads right into valuation. So we have an enterprise value of approximately one, let's say 1.4 billion. It's a tad under 1.4 billion. And the two numbers I looked at were

EV to gross profit and EV to operating cashflow. I think the most relevant would be EV to gross profit, just given that indicates just because things are messy after the public transaction, I think it's just the most important. It's not cheap by any means, even though the stock's down a significant amount. Our EV to gross profit is about 9.6, which is well above the market average. It's pricing in a lot of growth and margin expansion from the existing, wherever they're at now. And if we look at EV to operating cashflow, it's 27.4, which again is not including, I believe they capitalize a good amount of software costs and then they have the heavy SBC. But on the other hand, they have the one-time costs from the SPAC transaction. So we'll see

how all of that evens out in 2023. Again, I think gross profit is the most important thing to track right now, along with the debt stuff that Ryan was talking about on the balance sheet. But let's move to anecdotal evidence. I guess since neither of us are in the LGBTQ community, Ryan, we don't have much anecdotal evidence here

as we might have on the other dating apps, but any thoughts here? I don't know if it's going to be too helpful for this, but any thoughts from your end? no i think a lot of people already kind of know what the grinder brand is um i did speak to like some people that have used it before and they just said um first of all it's not the only app they use um you know a lot of uh it's it's very similar i think to heterosexual dating just plus grinder where you still use like tinder and bumble um and you just filter for your same sex

or, you know, whatever your preference is. But then you also have Grindr on top of it. So it's not, I wouldn't necessarily think of this as like a complete monopoly on LGBTQ dating. Yeah, yeah, yeah. You might think of that at the start when you read more into the industry. It's definitely, I agree with you.

I'll keep it short here. Don't have any anecdotal evidence, but I don't think management is lying or trying to exaggerate when they say this is the LGBTQ app with the best brand awareness. nothing really comes close in the zeitgeist if you want to say it like that where when you think of ask anyone i guess that's younger and you say what's the dating app for gay men specifically because that's kind of their biggest demographic they would say grinder for sure and there's not

none of these other ones i i've never heard of i'm sure some other people have heard of them but they don't seem to have nearly the user base as someone like grinder which is an advantage but again like ryan mentioned just because tinder hinge bumble and the others uh generalist ones are not exclusively for lgbtq people it doesn't mean that the people that are you know a gay man can't use them yeah all right let's move to future growth opportunities ryan what are you seeing here i actually struggle with the dating app companies because in reality it's almost always just get more users, optimize monetization.

And all of this is, it all leads back to that strategy. Here, you know what? Why don't you go first? Because I actually saw one that's kind of unique. I didn't choose to use it because I thought it was maybe bullshit, but it is kind of unique to them.

So I'm going to pull that up in a sec. All right. Well, my future growth opportunity, this is something they talk about in their analyst calls. And it's something that I saw when researching user reviews is a better advertising and a more holistic digital experience for LGBTQ communities around the world.

So I'm not sure exactly how this will work, but it's something, again, they've talked about a lot as an executive team on a few analyst calls they've done since going public. Their spammy advertising gets tons of complaints from reviewers on the app stores. What was funny is in their first conference call, they utilized one of those individual investor platforms where anyone can write in stuff. and these individual investors were very upfront about how they hated the spammy advertising. And this new management team said, yes, we agree. We just can't get rid of it overnight. It's something they pretty much blamed the old management team on doing. So I think there's

definitely room to expand their advertising platform. But on the other hand, and this ties into the advertising as well, is they want to expand from a mere quote-unquote hookup app for gay men to a full-on social network for the LGBTQ community. And to be honest, at first, I thought they were pulling our leg saying that because a lot of these dating apps talk about being a holistic experience when in reality, we know why people go there. However, they get more usage. They get TikTok-level usage from their MAUs per day.

I think it's an hour per day on average from their active users. So there's potential there to expand in it. And maybe they're the one that can expand and make it better. And I think, you know, if you're an investor like us, I have no, you know, we have no personal experience with the app and it's tough to predict what they're going to do. I don't know what the best way to serve the community is. But I think trusting management who, again, I believe the CEO says he used Grindr all the way back in 2009, 2010. They know that better. They know what this demographic wants or what the sub niches within the LGBT community wants.

And I think there's potential there, but it's pretty speculative on my part. The key one, I think, and since advertising is a high part of their revenue base, is to fix that because a lot of reviewers, a lot of users are very upset with the spammy ads. Yeah, I think they've even said that they expect advertising revenue to either come down or stay flat as they get rid of the most spammy parts of it. But touching on that last point you mentioned, expanding into new businesses, they highlight this and so i'll just say the quote it says grinder not only has the largest user base of gay bi and trans men in the world we also have a deep connection to a broader lgbtq community by

tapping into our community's needs unique needs we can develop distribution partnerships products and services that deliver new revenue lines that have a hyper focus on this highly valuable demographic i think there's some merit to that too because you think about it's not it's it's a more difficult dating environment um obviously depending on where you are but like having partnerships with bars or like more inclusive places or more you know more inclusive venues i think that could potentially help as as another incremental revenue driver the other one and this is kind of the obvious boring one is just increasing their payer penetration rate um this clearly a focus of management right now uh it's like seven percent of users on the app

that is well below bumble and match group and i know they've been rolling out monetization kind of um late relative to some of the others but i think there's basically two ways they can do this so first of all you can roll out a la carte transactions obviously that means more people will be paying because it's an easier hurdle to get over for like a one dollar boost for the day or something like that. But the other one, and people are going to hate me for this if they use the app, but I think once you've gotten to a certain scale where the brand or the platform sells itself, you can be more restrictive around what free accounts get. If there's still a decent amount of benefits for the free users, you can load some of those over to the paid side because

it's not like you're not going to lose the user traction like you may have in the early days because you put everything behind the paywall. At this point, everyone knows that you kind of have to be on there for just service, whatever the value proposition is that they're trying to service. I would think they can be more restrictive and kind of drive payer growth that way. But I know that's the least win-win-win way to drive growth. I know. I'll talk about this in my highlights and lowlights, but I think their user model with this geographic stuff might limit them a bit more than the swiping apps on the upsell monetization features. But again, there are some ways to be more restrictive and maybe they're selling themselves short right now. But let's move highlights and lowlights. Ryan, what do you like? What do you dislike about this stock?

looks like we probably have pretty similar ones. And it almost with all these dating apps comes down to the network effect. Yeah, I mean, the brand strength and the network effect, they spend just like almost, I think a rounding error on marketing, yet they have 12 million monthly active users. Should they up that to 10% of revenue

just because they should have some easy return on ad spend out there, right? I would think. I imagine if you're in the LGBTQ community, an advertisement for Grindr is not going to change anything. They already know you exist. True. Maybe internationally it would help, but in the US, in their core markets that have been around for a while, maybe there's not. Everyone already knows. Yeah, I agree. But I think that's it. The scale they've reached without the marketing spend is a testament to the

notability or the notoriety of the product. The other highlight I have here is, and we briefly talked about this at the start, but the appeal for online dating is much stronger among the LGBTQ community because it's tougher to date in that. Okay, let's compare it to the real world. even as a straight male, if you go to a bar, it's not easy to go up to someone because it's hard to tell if they're necessarily single or something like that. You don't want to come across as rude or invasive or anything like that. And so there's some appeal to being online where you know for sure that these people are looking to date. It's way harder in the LGBTQ realm because you don't know if they're straight or LGBTQ, especially at a non-designated gay bar,

that kind of thing. So there's way more appeal to be online because you know who the pool of potential daters are. It's very much more clear. And I think that's why they have 65% of gay men in the U.S. or relationships in the U.S. start online. So, I think that deepens the network effect too and the brand strength. Now, Grindr really resonates with that community. It's very clearly has established brand and I imagine that's going to persist for a long time. Other one here, Demographic Tailwind. They put some stats in their S1 about the kind of the rise of the lgbtq population globally um obviously they're globally there is there's some countries that aren't yeah yeah some countries are not very accepting yeah

some countries aren't receptive to it um i think but you know if you look out over the last 50 years clearly the world has become more accepting of of the community and so um i imagine that That's a trend that will probably continue, which provides just a demographic tailwind for Grindr as a whole. Low lights for me, though, and I have a few. The CEO, to me, and maybe he was kind of put in this position and there wasn't a whole lot he could do about it, but it felt like he was masking some of their problems and intentionally being dishonest. Um, so he was interviewed on the day they went public and he seemed very dismissive whenever something was brought up that wasn't pure excitement about the business. So he was asked, do we actually know how many total shares are outstanding?

And he said, I don't, I don't actually exactly know how many shares, but I think it's over 120 million. There's 173 million total shares outstanding. So SPACs are confusing, but yeah, it's a number you should definitely know on IPO day though. Yeah, I was a little bit in the same boat of concerned over his grasp of the business, right? Or the grasp of increasing shareholder value, like what's important to the shareholders. He knew how to drive growth, I'm sure. Well, sure, sure. Yeah, yeah, yeah. Growth of users and stuff like that.

but I'm just talking about less on that side and more of the nuts and bolts of this corporate structure. Yeah. And he also was not like, he looked, one of the other hosts that mentioned, he's basically said like, Hey, your, your press releases say that you'd raised $384 million in the SPAC, but you guys don't get any of that cash. Right. And then like the CEO was like, just kind of looked at him, like kind of pissed, like, yeah, we don't need it though.

were profitable, that kind of thing. Almost upset that he brought it up. It felt like they were just overly promotional about trying to get the stock up, not caring about the actual shareholder. It felt like one big dump onto retail shareholders or the markets. That's never a good sign for us as minority shareholders. The other thing, just in general, this whole SPAC transaction wreaked of 2020 irrational exuberance vibes. The dishonesty, the unnecessary complexity, the no cash being raised in the transaction, it feels like they played this card too late, but the market fell for it again. Well, they fell for it for a couple of days, it seems, and the stock just mooned, but now the stock's down, what, 50%?

Yeah, more. It went from like $31 to $5 now. Yeah, but I'm talking from the $10 SPAC transaction. Yeah, which probably gave people enough time to get out. Maybe the warrants won't go through and those will all expire worthless. Who knows? It's possible. Last thing I'll say, they're heavily indebted. The variable rate, I'm not sure what the remainder of the debt is, but I'm assuming it feels like it's variable rate. that's that's not a positive especially in a rising rate environment but that's that's kind

of obvious the other thing is if rates continue to rise and if interest expense continues to rise for them i'm afraid that they're going to juice stock-based compensation to pay it back so even though they'll be able to potentially uh generate enough cash to pay off the that interest expense it's going to come at the expense of dilution yeah it's possible all right i'll move to highlights my number one very strong moat i think well i wouldn't give it the top tier moat but i think it's good and i think it can be potentially wider than the other leading adapts because of the focus on the lgbtq people but again we did talk about how tinder bumble and hinge all cater to these communities as well just not exclusively and i i just think there's an advantage of like you know

not spending on the marketing and stuff like that. Then my second highlight is historically, this old management team was very bad at optimizing pricing and monetization. For example, they didn't even have profile boosts until summer 2022, which is absolutely absurd. How do you not have... You were a company for over 10 years and you didn't have profile boosts? just look at what every other company does in this space. And it's amazing they didn't have that. However, the highlight here is this is not having any of these features

that this old management team just totally dropped the ball. It gives them an extremely easy path to revenue growth over the next few years. And they can just copy the key product features from Tinder, Bumble, and Hinge and apply them to their active user base. Lowlights, SPAC deal nonsense. Pretty obvious we need to wait

until the 10K and proxy come out, and probably two to three years of them being a public company before investing in the stock. We want the 10K and the proxy just for any of the nonsense that we might have missed, but we also want the two to three years for this management team that I think we are a bit wary of. This is their first quarter being public. I want to know how they can go through a market downturn, and they're experiencing it right now. So we'll see. It's very important, to get a few quarters under a company's belt at least in probably two to three years as a public company. Second of all, I think, and maybe it's just in the US, but Bumble and Hinge are much better at catering to the LGBTQ crowd than Tinder is or was.

And if they can succeed in segmenting their apps much better, where people can get the same experience as they would on Grindr, where you basically can join, say, the gay part or the buy part or the the trans part of of hinge and bubble and you can essentially get excluded from the people that you don't want to see and you see only the people you want to see the experience is the same as it would be on grinder in that situation i think that was your user acquisition ryan you have something to add there yeah i was thinking about listing that as a low light is the you know that it is in a monopoly and there's competition but i don't think competition's the biggest thing to concern

the investors should be concerned with for Grindr. I think the biggest concern is them this is one of my next ones is I think the core monetization process is going to be harder for Grindr given their different setup from a user

experience where they have this extreme focus on geographic location as opposed to the swiping apps that set up the radius within your area and randomly give people potential suitors within that radius. And I just think it will be harder for them to monetize unless they can change up the user experience drastically and almost really copy the swiping apps because those are much more suited for these upsells for unlimited swipes, unlimited people to

see. And some of their... Looking at their subscription features, one of them is no advertisements, which is just very weak as a product offering. It shouldn't be too difficult to do this, but I think they have a bigger hurdle because they're going to need to change up a few things. And it just adds some risk where if you change some things up, you could ruin the user base and stuff like that. Or some people could get upset. And then also low light is that focus on spammy advertising. I think it's going to be a headwind for them the next few years because they're going to need to eliminate it pretty much entirely because so many people are upset about it. And it's also a significant chunk of their revenue at the moment.

Maybe they can make up for that with the better LGBTQ branded ads that they talked about. but I have my doubts. All right, bull case, Ryan, what do you think? You're pretty bearish here. I got to say, your growth numbers might be a little low, but your bull case sounds like the bear case, but go ahead. Yeah, okay.

Well, you talked about management's guidance, and honestly, I must have missed, glanced over management's guidance, but maybe part of the reason for that is how many SPACs met their guidance? 1%? Maybe. Uh, so I, and if we get to the, listen to 15% revenue growth is the bear case, then

this business is going to be in fine shape. But my bull case is that, you know, they've got 15% pair growth, average revenue per pair stays flat and free cashflow margins are at least 20%. The reason I say that the, just the 20% free cashflow margins, they now this year, they They may have had diminished margins due to some of the one-time SPAC expenses, but they've said they're going to keep hiring at a faster pace. So operating expense growth has outpaced, or this year it outpaced, revenue growth. I mean, if that continues, you can certainly expect margin compression.

As TBD, though, I think given their marketing spend, they potentially could get closer to 40%, even higher than a match group because we saw with Bumble, what's holding them back a bit is their higher spend on marketing. Match Group has less spend on marketing, and they're what, in the 30% to 35% on their adjusted EBITDA range, which translates pretty well to cash flow. I think if Grindr is able to grow without spending anything on marketing, and again, they might be too subscale for their technology development teams and their general administrative teams to get that margin, but I think they could get closer to 40%.

But I also wouldn't be surprised if it's stuck at 20% given how subscale they are. Okay. You've convinced me. Let me plug in 30% instead of 20%. I mean, it's not going to look great. Sure. And plus, that's still not excluding SBC, which is going to be high given that healthy RSU package that, what's his face, the CEO got. All right. Basically, if they had 30% free cash flow margins and grew revenue 15%, and I've excluded advertising revenue because I think it'll be muted. as a percentage of the overall business in four or five years, they would be doing just under $100 million in annual free cash flow.

Those are some positive assumptions for sure. You also have to factor in some dilution, at least 2% to 3% annually. That's giving them probably an EV of like at current prices with that share dilution, the market cap would be like 1.2%. So you're probably looking at a $1.5, $1.6 billion enterprise value. So 16 times potentially 2026 free cashflow. I mean, it's definitely not cheap. You'd have to get 20% plus revenue growth and margin expansion for the next five years.

And that's kind of my bold case is given their guidance for about 25% revenue growth, I think they could hit around, well, that would lead them to be hitting around $500 million in revenue for this app within four to five years. I think that potentially makes sense given the white space internationally, their secular growth, and then the easy monetization add-ons like boost that are just cakewalks to head to the app. I think it's doable. And then if you add on that high adjusted EBITDA margin, you could probably get $200 million in adjusted EBITDA. It's pretty cheap versus the current EV of $1.4 billion. But remember, the EV is going to be higher. And this is looking four to five years out. So this bull case, you have to be pretty

optimistic on the multiple. You got to think at least that revenue, or excuse me, the multiple is going to be probably around 20 times their adjusted EBITDA. And again, that's adjusted. And then second, you got to be betting on at least 20% annual revenue growth from these prices. Now let's move to the bear case, Ryan. I think the obvious one is slow revenue growth, but what else do you have? Yeah, that is one. The other part is it's a business that maybe it's just because they're going public right now, but they've been around for longer than Tinder. They've been around for longer than Bumble, longer than Hinge, longer than a lot of the match group properties, yet they're still treating, I think they're treating their time in the business

journey as an emerging growth company. And I think they explicitly say that in their S1, but and they talk about like our number one goal is hiring as much like great talent as we can they've even you know they're they're expanded headcount it's a business that should not require that much headcount right at this scale they said they had major tech debts so i guess maybe they have to dig themselves out of that hole yeah i guess i don't know enough on the text they said they said the messaging was so bad i think honestly one of those individual investors brought it up on the the conference called the messaging functionality was so bad that a lot of people were not able to send messages and a lot of people weren't receiving them which

is a core thing you need on one of these things so i think there could just be a huge amount of tech debt which you know you could say hey we need to hire these people but you have to factor that into what the margins are going to be yeah all right i'll just simplify it i think maybe there could be some margin compression but really the big ones are going to be multiple compression for selling from the if the spec and maybe that's already been happening in some ways from the major spec investor um worse than expected dilution potentially um i think those things assuming that the business still does well. I think if you get a lot of those things, you're probably going to have a stock that's flat over the next couple of years. Yeah. And at least it's sort of

my bear case as well is one of the bull cases and one of the stuff that the current management talks about is the mismanagement from the old executive team. And I think they talk about how there was that lack of monetization and how it could have just, there's such an easy path ahead for them from their current user base that's just going to steadily grow each year if they keep up their current numbers. But maybe the lack of monetization, like Ryan mentioned, this app's been around for almost 15 years now, is just a fundamental flaw in the user experience, not because of this lackluster prior management.

I worry that just given the difference in use case for the geographic location stuff, the amount of time people are spending on this app, regardless of whether they're a hair or not, they might have to take a big risk and change up the business model a little bit here. And I also worry that the newer data apps like Bumble and Hinge cater just fine to the LGBTQ crowd, and maybe they are not going to capture as much as the Gen Z audience, which is a huge chunk of this demographic. I would love to see the numbers of them versus Bumble and Hinge for the Gen Z demographic.

All right, let's wrap things up. Ryan, more or less interested? Grinder. Yeah, certainly less interested right now. It's not one that I would say is out of the question of owning down the road, but it's got to be years away from this SPAC deal. We have to have a couple of years probably for me of audited financials, some 10Ks, some proxies. And then on top of it, I want to see how management... I think management team's new. Let's see how they do. Let's see if they have a focus on shareholders. But we know the online dating business pretty well. And we know, I think, that these businesses can be very profitable. So it's certainly not one that's out of the realm of owning. yep i'm in the exact same boat i am not interested simply because of proxy stuff simply because of management stuff but i'm very interested in this business because well i wish they were a bit more diversified because it's a one trick pony but this is one

of the big four well no there's more than them this is one of the big ones it's one of the big for the dating app space. Yeah, yes. I think there's just a lot of profit potential from these things. And at the right price,

with the right management team, if they've proven themselves, yeah, who wouldn't want to own this? All right. Let's go do it for this episode. Next week, we're hitting a microcap

within the dating app space, Spark Networks. What do they even, what company do they own, Ryan? Or what app? Let me double check. All right. double check while i go through our housekeeping items if you're a regular listener they own

okay they got zeus silver singles elite singles j date christian mingle e darling j swipe that's gonna be a i don't want to call it a shit co but that will be a i think some of these are It could be a messy microcap. I mean, Christian Mingle, I mean, they're very, they got some niche audiences. They do. And there have been some pitches

that this is going to be a strategic acquisition for other companies and we'll investigate the validity of that. But yeah, if you like, if you're a regular listener to the Not So Deep Dive Episcodes,

make sure to subscribe to our free newsletter and get our show notes and charts for each episode. We reference the ownership table. There's going to be some charts throughout this episode. Again, not as important for this one.

because they just went in public. But we utilize tons of Stratosphere charts and then our own charts within companies that, which are most of them that we cover, have been public for more than five years where we give some nice charts on users, all the key KPIs. And again, check out Stratosphere because they save us tons of time when making that. And the link for that can be found for the newsletter by searching Chit Chat Money by looking in the show notes, we'll have a link there, or by searching Chit Chat Money on Substack. It goes through that. If you like watching these episodes, you can do so either on YouTube or Spotify. And if you enjoy the show, give us a review on either Spotify or Apple Podcasts. We are not financial advisors. Anything

we say on this show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next week. Thanks for watching!