Not So Deep Dive: Grindr Stock (Ticker: GRND)
Is their value in this LGBTQ dating app?
Reminder: these are show notes that should be read in conjunction with the podcast. Do not expect these notes to be a polished research report.
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Show Notes
(Ryan) What they do: Grindr is the world’s largest online dating platform focused on the LGBTQ community. As of the most recent quarter, the platform was home to more than 12 million monthly active users (about the same size as Bumble when they came public) and 873,000 paying users. Grindr is similar to many dating apps in that users can create a profile for free and access the platform on a limited basis, but there are also some nuances to the platform that make it a bit different.
For starters, the basic user interface is quite different from swipe-based apps like Tinder, Bumble, and Hinge. Whereas most apps have a “single-file line” approach, Grindr has a grid-based layout. So as a free user, the home page generates 100 profiles within your geography and you can also filter by stats and intentions. Then there’s also a “fresh” page and an “explore” page. With Fresh, it’s the same grid-based layouts, but it’s people who have joined the app in the last 72 hours, and the explore page is a map that allows you to move your profile around to different destinations which changes the accounts that can be seen on your grid.
As for monetizing, Grindr has a couple of ways to make money:
Direct Revenue (subscriptions and a la carte): Like most apps, Grindr sells subscriptions that allow users to unlock additional features on the platform. The two big ones are Grindr XTRA and Grindr Unlimited. Both vary in price depending on how long you purchase them for (1 month, 3 months, 6 months, or 1 year).
XTRA: With XTRA, you get no ads, access to 5x more profiles, you can search by additional filters (height, weight, etc.), and a bit more. The standard price here is $10/month.
Unlimited: You get all the same features as the XTRA plan and more. So subscribers get access to unlimited profiles, they can see who has viewed their account, they can explore in incognito mode (browse without being seen), they can unsend messages and more. The standard price here is $25/month.
A la carte: Grindr is also in the process of rolling out some one-time purchase features. From what I can tell all they have right now is Boost, which makes your account visible to more users.
Indirect Revenue (advertisements): Grindr sells ad space across its app to both advertising service providers (SSPs/DSPs) and directly to advertisers. This currently accounts for 16% of revenue and will likely shrink as a percentage of the overall top line as they continue to roll out new direct monetization features. Advertising also gives emerging dating apps a way to make money without prohibiting growth.
(Ryan) History: Grindr was created as a mobile app in 2009 by an Israeli entrepreneur named Joel Simkhai. From what I can tell, the platform had many of the same features that it still has today and saw strong adoption pretty much from the start. As the number of people with mobile phones grew, so too did Grindr. The app won many awards and was cited in lots of blogs which really continued to drive growth. It doesn’t appear that Grindr took any venture money throughout its early years. However, in 2016, Grindr sold 60% of the business to a Chinese mobile gaming and social networking company called the Kunlun Group for $93 million. Then 2 years later, sold the remaining 40% to the Kunlun group for another $152 million.
Kunlun Group had intentions of taking the business public via an IPO but after the Committee on Foreign Investment in the United States (CFIUS) determined that having a Chinese owner run Grindr was a national security risk they derailed their plans and started looking for a buyer in the US. This ultimately led to them going public via a SPAC in November of last year. Important to note that the SPAC did not actually generate any proceeds, it only gave the existing shareholders a way to sell. Here’s a quote from the S-1: “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.”
(Brett) Industry/Landscape/Competition:
As with the other episodes for our online dating theme, the industry and competition are fairly simple to understand
From our last episode, we can estimate the size of the online dating industry to be around $5 billion in global annual spending. Grindr equates to around 4% of this annual spend
Competitors: There are two groups I would put them in. First, is the “generalized” dating apps (namely Hinge, Tinder, and Bumble). They don’t cater exclusively to LGBTQ+ but have services for them. Second, there are LGBTQ-focused dating apps like Hornet, GayStryst, and many others.
As of this writing, Grindr is the 51st top-gross application in the United States on iOS (Tinder is 5, Bumble is 8, and Hinge is 14). The other LGBTQ-focused apps are nowhere to be found in the rankings, indicating that Grindr is the big winner right now in the category.
According to management and industry surveys, approximately 65% of homosexual males meet online, which is higher than the overall population.
(Brett) Management and Ownership:
The current CEO of Grindr is George Arison. He joined the company in late 2022 around the time it was prepping to go public
As a part of Arison joining the company, he received a five-year restricted stock unit plan worth $44 million at the time of its latest S-1 filing. Expect this plan to continue diluting shareholders in the years ahead.
Arison gets extra RSUs if Grindr hits market capitalization hurdles (the first one is $5 billion I believe). This is a red flag as Arison is now heavily incentivized to make Grindr bigger, but not to increase per-share value.
Base salaries and everything else had nothing unique, very standard for a company like Grindr.
For ownership, I am a bit in the dark (or at risk of getting something wrong) as we only have the SPAC filing documents and no annual report/proxy filing
As an aside, with SPACs we always wait for audited annual reports (10-K) and proxy filings to come out before investing
The ownership table is updated as of the S-1 on January 6, 2023, which is after the SPAC merger. Again, if you are interested in this stock I would be keen on looking at the proxy filing when it comes out this Spring. As of this writing, Tiga Investments owns around 50% of this business (or affiliates that Raymond Zage III manages). Over 80% of the company is owned by non-executive directors.
(Ryan) 2022 Earnings:
$195 million in revenue, +34% YoY
74% gross margins
$45 million in free cash flow (or 23% FCF margin)
They report 44% Adj. EBITDA margins but generated less than $1 million in net income for the year. (The bulk of that difference is from interest expenses and SBC)
12 million average MAUs in 2022
873,000 paying users at the end of 2022, +22% YoY
6.9% of overall users are paying users (lower than other dating apps)
Average revenue per paying user was $17.28, up 7% YoY (however, rollout of a la carte will likely drop this number)
(Ryan) Balance sheet and liquidity:
Cash/Earnings:
$9 million in cash
$85 million in annual Adj. EBITDA
Liabilities:
$361 million in total debt
$195 million is in a variable rate credit agreement with an effective interest rate above 10%.
I can’t tell where the remainder of the debt comes from because we haven’t had a 10-k yet, but it looks like the debt has essentially doubled since the S-1 filing.
Interest expense this year was $32 million or 9% of total debt outstanding.
My assumption is that the remainder is variable rate as well.
Net debt of $352 million. Debt to EBITDA ratio is above 4x.
(Brett) Valuation:
Market cap of $1.1 billion
Enterprise value of $1.4 billion
EV/GP of 9.9
EV/OCF of 28.2
Anecdotal Evidence:
(Ryan) Clearly, it has resonated with its target audience. I spoke to a friend who has used it before and he said it caters more to the casual intent dater instead of the serious dater. Still directly competes with Tinder, Hinge, and Bumble though.
(Brett) Don’t have any anecdotal evidence but they are not lying when this is the LGBTQ app with the best brand awareness. Nothing really comes close in the zeitgeist.
Future growth opportunities:
(Ryan) Increasing their payer penetration rate. This is clearly the focus of management as well. Right now only about 7% of users pay on the app. That’s well below both Bumble and Match Group. There are a couple of ways I think they can do this. First, rolling out more a la carte transactions, but I think at this point, they can also be more restrictive in what free users get. They’ve got enough scale that the platform sells itself, they can probably do more to separate the paid plans from free plans now without hurting user adoption.
(Brett) Better advertising and a more holistic digital experience for LGBTQ people. I’m not sure exactly how this will work, but it is something management has talked about on the few analyst calls they’ve done since going public. The spammy advertising gets tons of complaints from reviewers on the app stores, and there is definitely room to expand this from a mere “hook-up” app for gay men into more of a social network. If you’re an investor with no personal experience with the app I’m not sure you can predict what they are going to do but have to trust management understands the market better than you do.
Highlights and lowlights:
Ryan’s Highlights:
Brand strength and network effect. They spend very little on marketing yet tout 12 million MAUs, really strong brand recognition, and they continue to grow users. I think that’s a clear testament to the notoriety of the product.
The appeal of online dating is much stronger among the LGBTQ community, which should deepen the network effect of the leading apps.
Overall demographic tailwind. Clearly, the world has become more accepting of the LGBTQ community, at least here in the US. All estimates expect the number of LGBTQ daters to grow over time globally.
Ryan’s Lowlights:
The CEO felt like he was masking some of their problems and being intentionally dishonest. He was interviewed on the day they went public and he seemed pretty dismissive whenever something was brought up that wasn’t pure excitement about the business.
He was asked “Do we actually know how many total shares are outstanding?” and said, “I don’t actually exactly know how many shares but I think it’s over 120 million”. That’s something he should know.
When he was pressed about the fact that their press releases said they raised $384 million, but the company doesn’t actually get any of that, he said he wasn’t really bothered and that the business doesn’t really need any of it anyways because they’re profitable.
The entire SPAC transaction reeked of 2020 irrational exuberance bullshit. They touted all the societal greatness of the deal, raised no cash in the transaction, added completely unnecessary complexity to the prospectus offerings without explaining any of it, and seemingly dumped it on retail investors.
Heavily indebted now. As rates rise, they can still likely pay it off, but I imagine it will come at the expense of dilution.
Brett Highlights:
A very strong moat that I think can be even wider than the other leading dating apps because of the focus on LGBTQ people. Tinder, Bumble, Hinge, and the other generalist apps by definition will not cater fully to this niche, giving Grindr an advantage in acquiring customers.
Historically, the old management team was very bad at optimizing pricing and monetization. For example, they didn’t even have profile boosts until this summer. This gives them an easy path to revenue growth over the next few years as they can copy product features from Tinder, Bumble, and Hinge.
Brett Lowlights:
SPAC deal nonsense. Pretty obvious we need to wait until the 10-K and proxy come out, and probably 2- 3 years of being a public company, before investing in the stock.
Bumble and Hinge are much better at catering to the LGBTQ crowd than Tinder is/was. If they can succeed in segmenting their apps where people can get the same experience as they would on Grindr, that could threaten future user acquisition. However, I still think Grindr would qualify under our “the 3 - 4 bars everyone goes to” rule for LGBTQ daters.
Focus on spammy advertising. They probably need to eliminate this entirely, which is actually a significant chunk of revenue at the moment.
The core monetization process is going to be harder for Grindr given the app’s more extreme focus on geographic location as opposed to the swiping apps that set up a radius and randomly assign you potential suitors in that radius. I just think it will be harder for them to monetize unless they change up some of the user experience, but this shouldn’t be too difficult given they already have solved the most important problem (a highly liquid marketplace).
Bull Case:
(Ryan) Hard to do the math here without a fully diluted share count (which they’ve clearly tried to not state), but let’s assume the market cap that the aggregators have is right (that implies ~173 million shares outstanding). If we assume that over the next 4 years, payers grow by 15%+ annually (certainly possible if barriers to become a payer shrink), ARPPU stays flat (might be optimistic), FCF margins are at least 20%, and share count increases by 3% a year. You’d be looking at $65-$70 million in annual free cash flow. Assuming stock price doesn’t change, market cap is ~$1.2B. So 18x 2026 FCF. Yeah, this doesn’t make much sense.
(Brett) Given management’s guidance for 25% revenue growth, we could be hitting around $500 million in revenue for this app within 4 - 5 years. Does that make sense given the whitespace internationally, secular growth, and easy monetization add-ons? I think potentially. At 40% adjusted EBITDA margins that is $200 million in adjusted EBITDA 4 - 5 years in the future. Assuming a lot of that turns into free cash flow the stock probably does fine compared to current EV of $1.4 billion. But remember, dilution is coming so the “look through” EV is higher than $1.4 billion 4 - 5 years in the future.
Bear Case:
(Ryan) Margin compression (said they’re going to hire a lot of people), multiple compression (probably the biggest one), sub 15% revenue growth, competition from other dating apps, worse than expected dilution. There are a lot of ways to lose money here.
(Brett) The lack of monetization is due to a fundamental flaw in the app’s user experience, not because of lackluster prior management. I also worry that the newer dating apps like Bumble and Hinge cater just fine to the LGBTQ crowd, given that they want to capture the Gen Z audience and this is a big chunk of that demographic.
Sources and Further Reading
SPAC presentation: https://s201.q4cdn.com/840224656/files/doc_presentation/2022/09/2022.09.15-Grindr-Inc-Investor-Presentation.pdf
Q4 Shareholder Letter: https://s201.q4cdn.com/840224656/files/doc_financials/2022/q4/Grindr-Q4-FY-2022-SHL-vF.pdf
S-1 Amended from January 2023: https://investors.grindr.com/financials/sec-filings/default.aspx