Spark Networks: A Risky Value Outlier

An asset-light business model with recurring revenues trading at multiples typically seen with a distressed retailer

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Aug 12, 2021
  • Spark Networks is trading at an extreme discount relative to competitors.
  • Transformation progress makes the stock a risky buy.
  • The company is a worldwide leader in faith-based dating brands, coupled with the 40+ age group seeking a long-term relationship.
  • The market is ignoring Spark's potential.
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Spark Networks (LOV, Financial) is a global dating company with headquarters in Berlin, Germany and offices in New York and Utah. It focuses on the growing 40+ age demographic as well as the population of highly religious singles looking for serious relationships within their faith.

Spark Networks has a growing portfolio of dating apps with branded websites. The company has around one million monthly paying subscribers. Brand names include Zoosk, EliteSingles, SilverSingles, Christian Mingle, Jdate and JSwipe. Affinitas GmbH merged with Spark Networks in 2017 to take the company public, with the addition of Zoosk coming in 2019.

The market seems to be ignoring Spark's value, in my opinion, as the stock trades at an extreme valuation discount to competitors in the online dating industry. Yes, it's a risky investment considering the company has made some poor financial decisions in the past, which is what resulted in the low valuation. However, the rewards could be worth it if the company successfully implements its transformation plan.

The transformation plan

Spark's efforts to turn itself around include:
  • A new C-level management team.
  • Research and development spending of $54.10 million over the last two years for crucial product enhancements.
  • Investor transparency by transitioning to a U.S. domestic filer with quarterly filings and an investor outreach campaign.
Many of their prior one-year and two-year investments and changes will be realized in the second half of 2021. Such benefits include live streaming video (which will launch in third-quarter 2021), social discovery functionality, improved matching algorithms, portfolio rebranded/look and customer relationship management. As a result, management expects higher 2021 revenue.

Recent financial results

On May 17, the company reports Q1 results for the first time as a domestic filer. Spark is now reporting quarterly, improving financial and operational transparency and building a shareholder base. Spark is presenting at several institutional investor conferences this quarter. The goal is to communicate details on overlooked growth and opportunities for improved profitability.

The company says that demand for online dating products among its target demographics, 40+ and faith-based, is growing 7% faster than the overall market. Also, management is forecasting organic growth for Zoosk, EliteSingles, SilverSingles and Christian Mingle.

Financial results were slightly down in the first quarter quarter. Year-over-year quarterly revenue decreased by $1.3 million to $56.4 million. The decline in revenue is because of a 3% decrease in average paying subscribers on Zoosk. The three largest legacy brands, SilverSingles, EliteSingles and Christian Mingle, grew at low double-digits in North America.

The first quarter adjusted Ebitda was $4.8 million, a decrease of $2.7 million compared to $7.5 million in the first quarter of 2020. The decline was due to Zoosk and coupled with a headcount increase. Average paying subscribers decreased by 27,837, or 3%, to 896,344 in the first quarter of 2021, compared to 924,181 in the same period for 2020. Spark's monthly average revenue per user (monthly ARPU) increased to $20.97 in the first quarter of 2021, compared to $20.80 in the same period of 2020.

The company ended the quarter with $17.3 million in cash and $96.1 million in debt. As of March 31, equity was $91.8 million compared to about $94.9 million as of Dec. 31, 2020.

Management reiterated 2021 guidance of $238 million to $244 million in revenues and adjusted Ebitda of $33 million to $36 million. Forecasted second quarter 2021 revenue is in the $54 million to $56 million range and adjusted Ebitda is expected to be $6 million to $7 million.

My take

A significant opportunity exists in the fast-growing 40+ and faith-based online dating markets. Combined with their recognized brands and product improvement, this should push years of growth for Spark.

The relative valuation is impressive for Spark. It's a stretch to compare this company to profitable industry leaders and much larger like Bumble (BMBL, Financial) and Match Group (MTCH, Financial). However, Spark's valuation ratios are ~90% lower than peers. It also has a lower valuation per subscriber versus Match and Bumble. Further, Spark is near its 52-weeks and outspent on research and development relative to its market value for the prior two years.



While I like the opportunitiy available with Spark, there are reasons why the stock is cheap. The risks of investing in this company include the inability to refinance large debt. It is also at risk of negative cash flow and could fail to post positive net income.It also seems to be conducting excessive advertising expense to maintain subscribers.

There could be permanent damage to the brand's value if subscribers decline, which could happen if critical mass is not reached to make the brand attractive for new online daters.


I am/ we are currently short the stocks mentioned. Click for the complete disclosure