It’s hard not to be jealous of the American market. I can’t even remember when last we had a genuinely exciting IPO (new listing) on the JSE. Meanwhile, barely a week goes by without an interesting new opportunity in the US.

The latest IPO to catch my eye is Bumble Inc, a dating app with an important difference. Women have to make the first move, which based on my experience a decade ago in Fourways nightclubs is probably a sensible idea.

In a win for female empowerment in general, the CEO is Whitney Herd, a 31-year-old female who is now a billionaire. She left Tinder in 2014 after suffering sexual harassment at the company.  There was a lawsuit that was eventually settled.

That settlement cannot possibly be as satisfying as the feeling Herd must get from having built a genuinely exciting competitor.

Another interesting point about this IPO is that Bumble went public the old-fashioned way, rather than via a shell company (SPAC) that would make us suffer through another barrage of annoying Tweets from Chamath Palihapitiya, the most vocal supporter of these blank cheque companies that are designed to list and then acquire other businesses.

Of course, the SPAC crowd are always alert to new ways to make money in a hot market. A SPAC called Corazon Capital V838 Monoceros Corp. (yes, that really is the name) will seek to raise $230m from investors, with online dating apps listed among the potential acquisitions.

Anyway, back to Bumble, which is a proper company.

The brand is brilliant

It’s impossible not to respect the brand that Bumble has built. The marketing campaigns completely support the core DNA of the business, with smart advert taglines like: “Be the CEO your parents always wanted you to marry.”

The longer-term opportunity for Bumble is the value in a highly engaged and loyal user base of women. One can easily see how this could translate into shopping and payments solutions, or financial services products. The modern world is all about building a platform of users and then monetising them in various ways.

Usefully, the company exhibits the power of a network business. Only 22% of new users come from attributable marketing efforts, with the rest from word of mouth.

Two horses in the race

Bumble as a corporate operates two apps: Bumble and Badoo. Badoo has been around since 2006, while Bumble only launched in 2014. Interestingly, Match Group (Tinder) tried to buy Badoo in 2018. The backers of Badoo helped Herd build Bumble, before combining the apps under a single company.

Badoo is clearly the more established brand, with 28.4 million monthly active users (MAUs) while Bumble only has 12.3 million. Badoo is focused on Europe and Latin America but is a top three lifestyle app in 59 countries and top five in 89 countries. Bumble is only a top five app in 30 countries.

Bumble operates a freemium model in its businesses, which means users can try the service for free but must pay a subscription to unlock all the features. The total user number is helpful for advertising and partnership revenues but sustainable success is found in the number of paying users.

Comparing paying users across Bumble and Badoo is eye-opening. Badoo is only slightly ahead there, with 1.3 million paying users vs. 1.1 million in Bumble (remember it had a much higher total user base). Even more importantly, average revenue per paying user for Bumble is $25.72 which is more than double Badoo at $12.54.

So, Bumble does an incredible job of converting new users into paying subscribers. Since that’s the app with the high growth rate within the group, this is good news for investors.

Does it make a profit?

In this day and age, you have to ask this question when a company comes to market. Many of them are loss-making, despite being household names.

Bumble isn’t in that category, at least when you view the 2019 numbers which aren’t skewed by the expenses and distraction of a corporate restructure and listing among other things.

The company generated $490m in revenue in 2019 and achieved net earnings of $85.8m, a margin of 17.6%. Adjusted EBITDA margin was above 20%. Free cash flow for that year was $91.7m, demonstrating the joy of a platform business once it starts to spit cash.

Things get a lot more complicated in 2020, with a corporate restructure as part of the combination of Bumble and Badoo by anchor investor Blackstone Group Inc, along with costs to prepare the company for listing.

If we just focus on revenue, an annualised result for 2020 of around $550m by my calculations suggests 12% growth vs. 2019. That’s not a rocket by any means but Bumble itself grew at 70% in 2019 while Badoo only grew at 8%.

So, Badoo is a mature business that is a handy cash underpin for Bumble’s lofty growth ambitions. Since Bumble seems to have an impressive ability to convert users into cash, it’s not a surprise that the listing caught the market’s attention.

The market made its move

Bumble raised $2.15bn in its IPO and saw strong demand for the shares, with the price up 75% in afternoon trading on the day of the listing.

Bumble is valued at around $13bn after its share price surge, a huge revenue multiple of 23.6x. Match Group is trading at a revenue multiple of around 19x.

The company believes that online dating isn’t a “winner-takes-all” market and I agree. It’s entirely plausible that someone serious about meeting a partner would use more than one app. You don’t go to just one bar, do you?

Unfortunately, that’s why I wonder if these demanding revenue multiples won’t turn out to be a bad relationship for investors. These companies are not cheap.

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