On Feb. 10, Bumble (BMBL) priced its IPO at $43 per share. BMBL stock closed on listing day at $70.30, and currently trades at $78.89.
The big question is – Should investors hold or buy at current levels?
In December 2020, Airbnb’s (ABNB) IPO was priced at $68, with the stock currently trading at $209.76. In the same month, DoorDash’s (DASH) IPO was priced at $102, and now, it trades at $212.71. It seems very likely that Bumble will follow the trend of these big IPOs and continue to move higher after a stellar listing.
There are fundamental reasons to believe that Bumble stock could be a value creator in the coming years. Let’s discuss these factors, starting with the industry outlook.
Market Opportunity
Statista estimates that the global online dating segment’s revenue is expected to reach $3.2 billion in FY2021 and increase to $4.2 billion in FY2024.
An interesting point to note is that the U.S. has the highest user penetration at 14.7%. Clearly, user penetration is low globally and there is a significant addressable market.
By the company’s own estimates, the global addressable market is 804 million singles who have access to the internet. By 2025, the addressable market is expected to increase to 981 million.
Bumble Can be a Cash Flow Machine
Currently, Bumble operates two apps, Bumble and Badoo. These two apps attract 40 million users on a monthly basis, but the revenue and cash flow growth trigger for the company is the number of paying users.
As of December 2019, paying users amounted to 2.05 million. The number of paying users increased to 2.51 million as of December 2020, with an average revenue per user (ARPU) of $18.48. As the number of paying users increases, the company is well positioned to accelerate its top-line. Further, Bumble believes that with the expansion of the monetization of its product offerings, and the development of new verticals, ARPU is likely to increase.
Another key growth trigger for the company is expansion into new geographic regions. The Bumble app is being introduced in Europe, Asia and Latin America, with the company focused on the localization of products and services. This could help in delivering sustained growth in paying users and ARPU.
Some Ballpark Estimates
As mentioned earlier, the company expects the global addressable market to reach 981 million by FY2025. Bumble is likely to have 98.1 million active users, assuming that the company can capture a 10% global market share.
Furthermore, even if 10% of the company’s active users are subscribers, it is likely to have 9.8 million paying users. By very conservative estimates, Bumble’s revenue could quadruple in the next four years, even if the ARPU remains the same.
It should be noted that paying user growth in FY2020 was 22% on a year-on-year basis. If the same growth rate is assumed, Bumble is likely to have nearly 7 million paying users by FY2025. Therefore, the ballpark estimate is not unrealistic, considering the fact that the company is pursuing global expansion.
The company will continue to invest in marketing and that’s likely to keep margins relatively depressed. However, as Bumble’s visibility increases, word-of-mouth will drive user growth. Margins could expand significantly in the coming years along with potentially strong upside in cash flows.
Bottom line – Bumble can deliver strong free cash flows in the next three to five years. Based on annualized revenue of $550 million for FY2020, the stock is trading at 15 times sales. Valuations might look stretched, but the growth potential makes BMBL stock attractive.
Concluding Thoughts
Upon first look, Bumble might not seem attractive from a valuation perspective, however, the stock is discounting a bright future. A women centric approach is a key differentiating factor, compared to the likes of Tinder.
Overall, Bumble looks like another IPO that could be a portfolio catalyst.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
