Bumble S-1 Teardown
Written by Joseph Perez, Financial Advisory Manager at airCFO.
Bumble Inc., maker of the popular dating app “where women make the first move”, will be going public later this month in an IPO that is expected to raise more than $1 billion. This offering is expected to value the Company at up to $6.5 billion, which at first glance is an eye-popping number.
Our team was curious: do Bumble’s financials justify this kind of valuation? We dug into the data and put together this writeup to help others understand the investment opportunity that Bumble presents. We see a company with a rock-solid core business, but the Company’s future performance will depend on its continued ability to grow, leverage, and monetize its brand.
Bumble’s core business is comprised of two separate mobile online dating apps, Bumble and Badoo. Bumble is a leading player in its primary markets of North America, the U.K., and Australia. Badoo is a market leader in Europe and Latin America with a broad geographical reach (it is a top three grossing iOS lifestyle app in 59 countries). Both apps generate revenue with a freemium business model by offering premium features through subscriptions and in-app purchases that provide paying customers with additional functionality.
Bumble has differentiated from other dating apps by positioning itself as a platform purpose-built with women at the center. Beyond dating, Bumble has launched Bumble BFF (2016) and Bumble Bizz (2017), seeking to capitalize on its woman-focused branding and utilize the network effect to extend its reach into womens’ lives. These products are not yet generating significant revenue, but will need to be a core part of the picture if Bumble wants to continue its high growth in the future.
Bumble is projected to report revenue of approximately $581 million in 2020, for a 19% year-over-year growth rate. This is down from the 35% growth in 2019. Revenue from the Bumble app made up 61% of the total revenue in the 9-month period ending September 30, 2020 while Badoo and other apps comprised 39%.
In the first nine months of 2020, Bumble reported improved gross margins of approximately 73%, compared with 71% and 69% in 2019 and 2018, respectively. Their COGS calculation includes app store fees, data storage costs, and some direct personnel expenses. A gross margin of 73% is roughly in-line with Wall Street analyst estimates for Match Group, which is expected to see some margin compression from previous levels of about 75% due to stricter enforcement of Google’s payment processing policies.
Bumble is expected to post a Net Loss of over $135 million in 2021, largely due to higher G&A expenses and costs related to their IPO. Bumble generated free cash flow of $63.7M and $91.7M in 2018 and 2019, respectively, though the Company is expected to report negative free cash flow of over $10 million for 2020. On the balance sheet, Bumble’s significant debt load will need to be carefully managed both from a cash flow perspective, as well as adhering to covenants including a 5.75x net leverage ratio on its $575 million revolving credit facility.
Overall, the company’s financial results are a bit of a mixed bag; they seem to have the ability to achieve profitability and positive cash flows, but revenue growth slowed in 2020 and there don’t seem to be any promising revenue opportunities in the pipeline.
Key Operating Metrics & Benchmarking
At the end of 2020, Bumble and Badoo had 1.1 million and 1.4 million paying users, respectively. Bumble’s paid user base grew by 34% and Badoo’s by 14%, reflecting a turnaround from 2019 where it saw a 9% decline.
Bumble app’s average revenue per paying user (“ARPPU”) for 2020 is projected as $26.26, down 2% from 2019. Bumble’s premium pricing structure its ARPPU higher than most competitors including Tinder, which is estimated to be closer to $21 in North America, but the downward trend is a bit concerning. While ARPPUs outside of North America tend to be significantly lower, Badoo’s $12.64 does appear to be significantly lower than Match Group’s estimated international dating ARPPU of approximately $18. This could translate into unrealized international growth potential for Bumble. If corporate strategy leads Bumble to more aggressive international growth, it can be done knowing that the market is capable of bearing a 44% higher ARPPU over time.
Management stated that the average customer lifetime is 12 months, implying a monthly churn rate of approximately 8.3% and customer lifetime values (“LTVs”) of $229.99, $110.68, and $165.08 for Bumble, Badoo, and overall, respectively. With a stated payback period of three months (encouraging given the critical need for a short payback time in a competitive industry with low switching costs) and gross margins of ~73%, Bumble’s estimated customer acquisition cost (“CAC”) is approximately $56, implying a robust LTV:CAC ratio of 4:1 – suggesting the Company is able to profitably acquire customers based on its current unit economics.
Bumble’s business model presents an attractive combination of: (1) strong unit economics and margin profile, characteristic of a pureplay freemium product, (2) high growth attributable to strong industry tailwinds, and (3) a leading brand with global scale. Further penetration of online dating and increased monetization and conversion of non-paying users provides additional runway for overall market growth.
Source: Michael J. Rosenfeld, Reuben J. Thomas, and Sonia Hausen. 2019. “Disintermediating your Friends: How online dating in the United States displaces other ways of meeting.” Proceedings of the National Academy of Sciences 116:17753–17758. https://www.pnas.org/content/116/36/17753.
As of 2018, close to 40% of couples report having met online, more than meet through any other network.
Bumble’s anticipated valuation generally seems to be in-line with comparable publicly traded peers and is projected to trade at a discount to forward revenue and EBITDA multiples relative to some of the pricier high-growth consumer subscription comparables (e.g., Netflix, Chegg, and Match Group). Potential long-term growth opportunities Bumble Bizz, Bumble BFF, and further leveraging Bumble’s brand, data, and infrastructure to further extend into women’s lives. If they are able to take advantage of their strong brand in order to widen their monetization opportunities outside of the main Bumble app, there could be significant upside potential.
The online mobile-app dating marketplace is a heavily saturated and competitive market. The predominance of monthly subscriptions and low switching costs puts additional pressure on companies to manage CAC payback periods and LTV in an industry where the end goal for a user is to eventually delete the app. Based on the information included in the S-1, there does not appear to be many novel opportunities on the strategic roadmap besides regional expansion and the ramp-up of Bumble BFF and Bumble Biz.
The filing also seems to suggest that the Company may be underinvesting in technology (compared with comparable tech S-1 filings), despite a stated focus on continued product innovation. With ARPPU declines in 2020, Bumble will continue to be challenged with increasing the conversion rate of free users to paying customers and offering pricing packages that resonate with its expanding user base both within its core dating services as well as Bumble BFF and Bumble Bizz.
Bumble’s S-1 notably does not include a well-defined or explicit strategy for continued growth and capital allocation, even as it relates to the ~$111M (net of underwriting fees) earmarked for general corporate purposes in the IPO. How (and where) Bumble chooses to invest this cash will be a significant factor in determining how the Company moves forward in the competitive online / mobile app dating market.
With robust forecasted growth rates in the global freemium segment, investors will likely be paying close attention to how Bumble will continue to leverage its brand and premium market positioning to grow its paid user base to capture additional market share. The Company has acknowledged product innovation as a key factor in remaining competitive “in a world where people have multiple ways to connect.” It remains to be seen whether Bumble will be able to monetize Bumble BFF and Bumble Bizz; if these products can begin generating meaningful revenue, it would serve as a strong confirmation of Bumble’s ability to capitalize on its ambitious market positioning as a “preeminent global women’s brand.”
Author Note: Joseph serves as a Financial Advisory Manager at airCFO. He has a background in growth private equity and investment banking where he advised private and public companies on numerous M&A, debt, and equity transactions.