The investment case for Nelnet, Dropbox and Match Group | Arch Capital

Bryce: [00:00:16] Welcome back to another episode of Equity May. It's a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. If you've just joined us, welcome. Congrats on starting your investing journey. We do have a podcast called Get Started Investing that will get you up to speed with all the basics if you're still feeling a little overwhelmed. But otherwise, let's get stuck in. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:44] I'm good, Bryce. Very excited for this episode. We've just come off a conversation with Ryan Henderson and Brett Schaefer, two portfolio managers at Arch Capital, a hedge fund based in Seattle. Fascinating conversation about three companies in their portfolio.

Bryce: [00:01:01] Yes, we really appreciate how public they are. They are also podcast hosts for chit chat and money and Ren. There was no dilly dally in this. We just get straight into it. We cover three stocks. No mucking around. 

Alec: [00:01:13] Yeah, you mentioned that they're so public, they publish their fund holdings on their website. So link to their podcast and to their fund is in the show notes if you want to find out more. But Bryce, he said, we didn't dilly dally, so let's not dilly dally. Let's go to the interview with Brett and Ryan.

Bryce: [00:01:30] I'm going to have to delay that Ren and just say that while we are licensed, we're not aware of your personal circumstances. So any information on this show is for education and entertainment purposes. Any advice is general and these are not by hold or sell recommendations. We are just talking about stocks in their portfolio at the moment. Now Ren. 

Alec: [00:01:48] Nice dillydallying. Let's go to it. 

Bryce: [00:01:51] So Brett and Ryan, welcome to Equity Mates. 

Ryan: [00:01:54] Glad to be here. Thanks, guys. Yeah, happy to be here. 

Bryce: [00:01:57] So in today's episode, we're going to cover three stocks. We've got Nelnet, we've got Dropbox and Match Group, so super pumped to get through all of them. Let's start with Nelnet. The ticker is NNI. It's the largest holding in the Arch Capital Fund. And as you've written, has this student loan company turned itself into the next Berkshire Hathaway. So I guess the first question we must ask is, has it and can you tell us about the company? 

Brett: [00:02:25] You know, that is a little it's a little bit of a teaser. Yeah, we think it has the potential to have some Berkshire esque qualities as we're going to get to. In another question, the insurance float stuff is not is kind of the opposite, to be honest, but from a management perspective, from the fact that they are outside of Wall Street, they're actually in Nebraska. But I think that's also just a coincidence where they're not in, you know, San Francisco or Toronto or New York or London or wherever. But they have one of the best track records of growing book value per share, which is an important for a financials focussed company like them. And the fact that they don't pander to the investment community, they don't do, you know, conference calls obviously do the stuff that's required of them and then they'll write an annual letter, which I have to say maybe not, they're not as great as maybe that has the Buffett ones. And those are just all timers, especially the early ones. But there's a lot of similarities here. They think long term, they have a lot of skin in the game. They really start with a small base and have grown over time and they're in a bunch of different businesses than Berkshire Hathaway. That stuff does not overlap really at all. But the culture, philosophy, how they want to grow their business, how they want to build a permanent empire is extremely similar. 

Alec: [00:03:43] So just for people who aren't familiar with the company, they issue student loans for Americans who want to go to college. And I believe correct me if I'm wrong, that one of the largest or the largest student loan organisation in America. 

Ryan: [00:03:56] Yeah, they well, they were one of the big originators. But I believe in 2008 the FFP program was taken in house by the U.S. government and so they had a lot of outstanding loans, which they had originated, but they're no longer under that program originating loans as much anymore. But they still have, I think it's 16 or $17 billion worth of loans on the balance sheet. And then they're also one of the largest. I think they're the largest in terms of market share for servicing student loans. So kind of being the intermediary there, it started out as kind of the origination and the servicing, but now it's more so they're still collecting the interest payments, but it's more so on the service and side, and they've kind of used that cash flow to deploy it into other avenues. 

Brett: [00:04:49] Yeah, I think that's perfect. Where they were in a very unique situation where they had this business, it was a great business, they had a great track record with it, but. The government stopped them and now they have this existing what you call melting ice cube, and they were forced to invest in other areas out of the blue. And it took a long time and it's still taking time now. It's going to take a 20 to 30 year process to really get this out fully. But they've shown a great track record of reinvesting in diversifying the business, and we think that's a sign that the management team is just really good at their job. So to put it frankly. 

Alec: [00:05:28] I love that analogy of a melting ice cube, and I guess in the case of Bourke Shire, they get paid insurance premiums upfront and then they pay out claims later and they hold that cash in the meantime. That's the insurance float. And Buffett has built an empire investing that float better than anyone else. And in this case it's a little bit different because the loan, the money goes out first and then it's slowly paid back over time, that melting Ice Cube and Nelnet are taking that money as it's paid back and investing it. And I guess that's how they're growing book value over time and all of that. So help us understand where they're investing that money, what are they investing in? And you know, I know, I know the next Berkshire is a bit of a hawk, but how are they? What are they investing in to build the next Berkshire? 

Brett: [00:06:20] So after the student loans they are investing in really a lot of different stuff. They focussed on the education side of things just because their bread and butter is really in, you know, education stuff, which is student loans. So one thing they've done is gone into education software for a lot of the rate, you know, primary secondary schools in the United States. This should be something like private schools that have tuition. They also go to college as well. So those administrative departments have to manage a lot of, you know, payment processing whose, you know, on whatever payment plans and all that good stuff and. Also just the software for managing an administrative office, which would be like principle, stuff like that. So they've actually been one of the leaders there. They've kind of rolled up some software businesses there. And that business a of the numbers in front of me but we believe is basically on track to be doing $100 million in operating income. Well, it's pretty close to that now. But, you know, if you just extrapolate the linear trend, it's going to go to $100 million pretty darn soon in operating income each year and versus their market cap of about three points. So we'll say three and a half, depending on where it's trading, three and a half billion dollars. That is a significant part of the business that they built over time. It's really not showing up in their book value because it's a software business and they've invested a lot of, you know, human resources acquiring other companies, all that good stuff into this business. So that's probably the largest part outside of anything in student loans. But besides that, they've invested in things like, you know, I guess it's a really a wide range. They have a big investment in a fibre communications company in in the Midwest of the United States, and they have the solar panel and solar energy financing company where it is very similar to the student loan business, except that it's solar projects and solar loans. So they take in third party investors. They also invest their own money. They lay out these projects for these construction companies or their internal solar construction company. They build out these solar array farms and then they get cash flow earning from that in a very you know, I think the tax reduction on that or the tax write off is, I think 26%. Again, not going to do the math, try to do the math here on this podcast, but it's very, you know, tax efficient. It can help them offset a lot of their taxes that they have to pay while also generating cash flow for them over an extremely long term. And then besides that, they have an investment portfolio. We can maybe talk about Hudl, which is a giant investment. They have the leading sports training and sports coaching and sports recruiting software around the world. And then they also just started a bank to, I think, increase their loan business again as the student loans on their books are falling off. They got a bank charter from I think it's the FDIC and there's so many acronyms in there, the financials and banking space, and they started it up a few years back. It's already growing to, you know, pretty fast. They injected some of their own capital into it and they're making private student loans, but not to colleges. So it's again, a bit confusing. But these are, to say, high school students, you know, going to a private school or families that are going through any sort of school in the United States that might cost money. And then they're also doing personal finance loans. So that's starting out and they're kind of building up their loan book again as that melting ice cube falls off. And then there's a lot of other nooks and crannies. They're a bit mysterious on what they invest in. So you have to look through the 10-K and the 10-Q to find exactly what they're. Yeah, it was on the books, but what's there we think is pretty promising and it's the track record again speaks for itself. I believe they've grown book value per share at 17%, including dividends since 2004. And if you go back even longer, it's higher than that. So we don't really care what they're investing in. Maybe if they said we're in a company now, we'd think they've gone crazy. But they, you know, we just want to make sure that again, that the culture is still there, the same sort of long term culture, and how they're taking this cash and hopefully redeploying it at good returns on invested capital. 

Ryan: [00:10:27] And that's one of the other interesting things is they are notoriously quiet, just they don't want to talk to investors. They don't do conference calls. We basically ran into the chairman at a meeting for a company called Boston Omaha, and we're like, is that is him? And we went up to him afterward or like, hey, you know, we're big fans like Share, you know, we love reading your shareholder letter. He's like, like how like, how do you hear about us? Like he was concerned that we had heard about now. 

Brett: [00:11:00] Some younger Yeah, yeah. We were thinking with some other investors there's a couple out there that know this company very well. We were thinking of all going to the annual meeting one year and try to make them do some sort of Berkshire like questions and answer for everyone, even if it's only for like 20 or 30 people. But they're even more non talkative with the media and stuff like that and say, Berkshire Hathaway even in the early days, which again, you know, can be frustrating sometimes, but we like that they're focussed on. They're not focussed on pleasing Wall Street. They're focusing on doing a job for their shareholders and the rest of their stakeholders. [00:11:35][34.4]

Alec: [00:11:35] Yeah, it makes me think of that. That book The Outsiders by William Thorndike. And you know, he profiles eight CEOs who just got incredible returns for their investors. And one commonality amongst them all was that they just didn't do investor relations. They didn't they didn't speak to Wall Street or anything like that. A lot of them weren't in New York or any of the big cities, and they were just focussed on, you know, our results will do the talking over time. So you love to say that. Now, Bryce and I are in Australia. We don't have the same sort of student loan system that you guys do in America. But we have seen the reporting over the last few years around pausing student loans and pushes to cancel certain student loans and all of that. When you think about an investment thesis for a company like Nelnet, does all of that conversation, any executive action by Biden or any moves by Congress, does any does anything in that world affect or present risks for your investment case here? 

Ryan: [00:12:44] It doesn't really I mean, there's a lot of theoretical that you can kind of play out here and you don't really know exactly what's going to happen. So I think the worst case scenario is that there's this long standing forbearance period where people don't have to pay, pay them back immediately, but then kind of wait because Nelnet part of their compensation for these on the loan servicing side is volume based. And so if people are kind of deferring payments, it's they've got basically all this staff that's not they have a much lower revenue base and the same cost structure. So it becomes an issue and they've had to do a number of layoffs because of that. But. I think eventually that that stuff will get paid if there's some big cancellation of the student debt. My assumption is that either the government just assumes the liability themselves or they pay off some sort of a discounted lump sum upfront, which I wouldn't be that I wouldn't have that big of an issue if they just paid them, you know, whatever, $2 billion or $3 billion this year and allowed them to or maybe it's not that much, but allowed them to kind of invest that now today. I don't think there's. I don't think it's a good look for the government to say, you know, we're going to give you a, you know, $0.60 on the dollar or something like that. We're going to cancel student debt because it doesn't encourage people to work with the government. So I think there's a lot of headlines that make it out to be kind of worse than it is right now. The student loans under the FFP program that they have, or I believe 98% guaranteed by the federal government because of the way that program works. So it really it's low interest that they get on it, but it's it's very low risk. 

Brett: [00:14:33] Yep. And just for the numbers two context there. Yeah. They if the student loans get paid back early, which basically means if the government in the United States decides to cancel all student loans like there have been proposals around that now has put out estimates where if they get an accelerated repayment, they would get somewhere in the neighbourhood of and it shrinks every year as their loan book melts a little bit more. But they would get like say, $1 billion upfront within like a year or two as those get paid back instead of, say, $1.6 billion, 1.6 excuse me, $1.6 billion over the next seven or eight years. So it's not a huge difference for us because they're getting a lot of cash today. They can either return it through buybacks or dividends or they have a lot of optionality. In that case, then the only material risk from that front. Is that the loan servicing business goes away, which is something they earn, say, 50 to $100 million a year on. It's not a very fast growing business. It might grow a little bit if student loan business kind of goes from the pre-COVID status quo, but it doesn't change the thesis materially for us. We still think they have a lot of optionality with their cash position. They've invested in a lot of other areas and that wouldn't I mean, yeah, the returns would be a little bit lower. This business be worth a little bit less, but we still think it's very undervalued without it. 

Bryce: [00:15:56] Guys, let's move to Dropbox, the ticker DBX, it's a holding that is just outside your top ten, but it is an interesting one to unpack given the competitors in the space and the share price movement down 20% over the past five years. So let's start at the top. Can you remind us about the business model of Dropbox? 

Ryan: [00:16:16] You know, it's funny because people hear the name Dropbox and they probably think like, Oh, that's still around. Yeah. 

Brett: [00:16:23] Yeah. You know, How boring is this? 

Bryce: [00:16:26] Yeah.

Brett: [00:16:27] Oh, my God. It's the most boring investment. And that's it's it, you know, that's where the potential opportunity to be around. Go to that. What businesses. 

Ryan: [00:16:35] Yeah. So I guess when it was kind of getting started it was founded by Drew Houston blanking on the other founder, but Drew Houston's the CEO today. And the focus was really just like. Cloud storage for your files. And pretty quickly, Google, Microsoft, Apple replicated that and gave it away for free. I think Google had like unlimited photo upload for free. And I mean, that was like Dropbox's entire business model. So obviously that, you know, that's a big risk. And so they slowly kind of moved towards they realised they had a lot of teams or a lot of groups that were kind of working and organising their content on Dropbox. And so they really kind of played into that. And it's over the last, I'd say 5 to 10 years it's been a big shift towards content collaboration. So pretty much we're competing directly with kind of Google workspace where small teams, small organisations can upload word docs, they can upload Google Docs that can upload, you know, it's pretty much file type kind of agnostic and you can collaborate on that content and you can now they've got native signature in there, they've got the acquired docs and so you can kind of get your document analytics as well. So it really a lot of smaller teams end up adopting the solution or often like a small group within a bigger organisation will kind of say, okay, let's start something on Dropbox. I mean they've got 17.9 million paying users as of last quarter and that has just trickled up, I think I want to say 24 quarters in a row. It's just trended up despite I mean, Google Drive gives this away for they give out 15 gigabytes of storage for free. So Dropbox is really kind of catered to that team solution if you think about it, like we use Google Drive. So I know we're not really customers from portfolio companies, but it's pretty sticky. You don't really want to switch because you don't want to have to, you know, poured over a bunch of files and you don't want to kind of have to restart and retrain like the wherever you're collaborating on your content, especially if you're on a team or a group. So ends up being pretty sticky. And it really just kind of lately the focus has been maximising cash flow for shareholders through House and still largest shareholder. They've done a number of layoffs and really reduced the cost structure and kind of just really and used all that cash flow to buy back stock. And it for a while the stock has come up a little bit. It was trading at like ten times cash flow. So it's able to really repurchase and reduce the share count pretty significantly and they use some debt to do it, too. So it's not a very complex business, but I think a lot of people get pretty fixated on that competition part and say, well, you know, there's no differentiation here. 

Brett: [00:19:33] So yeah. And well, one thing I would add there is that we really had the same thought initially when looking at this. I bet the way we saw it was, you know, so much. So when I wrote a blog post or did a podcast is kind of have a lot of us or saw something on Twitter discussing one of their news items and goes, Oh, that's an interesting comment to maybe look at. But the first thought as you look at well. You know, Dropbox, I know kind of what it is. I maybe have downloaded it. I'm not a core user because the majority of their users or they talk about how many registered users they have. I think they have 700 million. I believe something like for reference, Google Workspace, which is basically Google Drive, has 3 billion in users. So they're not that much smaller than, you know, Google. They're still sizeable, but they are much smaller. And then the paying users, as Ryan mentioned, is is just under 18 million. So the core users are going to be quite small. So just from any more, you know, typical investor perspective, you're looking at it like, you know, wouldn't Google Drive kill that? Would Microsoft OneDrive kill that? Wouldn't Apple? I believe it's called iCloud. Kill that or any sort of Apple product. Try to kill that. And what's a funny anecdote is that back in, I believe, the early 20 tens, Drew housing got a call or some sort of acquisition bid from Apple and they offered something like $1,000,000,000. And when thousand declined, Steve Jobs basically, you know, as we know, he was kind of a prickly pear. He he like told them they're going to put them out of business and something like that. But the fact is they haven't. I think what kind of clicked in our minds is that everyone has a perspective, but you would have had that perspective in 2017. And every quarter since then, they've grown their paying users and their earnings have gone up and they're returning more cash to shareholders. So it's more of like I think almost all of us are biased against Dropbox just because our personal preferences or why, you know, well, why are people paying for that? But I think as I mentioned, the key here is that the market doesn't need to be winner take all with Google. A lot of people are going to be free, but the people that do pay, they're going to sweat, they're going to stick around. And it's really uncomfortable to switch. And if you're paying $150 per user per year, that's not the end of the world. If you're a business of the size of, you know, a million, five, $10 billion in revenue. 

Alec: [00:21:54] Yeah, It is fascinating. Everything that you said about the Dropbox business is exactly what I thought. You know, that all of these big tech companies use it as essentially a loss leader, as a way to get customers into their ecosystem. But, you know, looking at Dropbox's financials, its profit and profit over the last two years, 25% or almost 25% profit margins, which doesn't really gel with the the idea that, you know, it's competing with the biggest tech players who are happy to offer their product for free or below cost. But I guess when you know, you make an investment like this and you think long term, you think like what can the business be in the future? Do you is that a core part of your thesis like that, what Dropbox will become, or is it more that it's well managed? It's cheap and it's returning cash or it's profitable? 

Brett: [00:22:50] I think that the thesis is really it stays or at least from our cost basis I guess the stock is run up a little bit but it we get the returns we're looking for, say, you know, solid double digit returns or from our cost basis, we don't need the stock or assuming the business to grow that much. So we just really need them to retain their customers and given their, you know, customer acquisition cost with the marketing spend doesn't have to be that high. They've I think the key thing for us is that they flipped from being that Silicon Valley company that investors maybe. Don't enjoy when they're spending money on lavish parties and stuff like that, and they're talking about revenue growth. And that's just, you know, yeah, they're growing revenue, but they're burning so much cash, they kind of flip to the opposite of that when they realised, hey, like we don't need 10,000 people running this, you know, workplace software program. We're going to we can really reduce our headcount and we can still be just as productive and provide value to our customers and they're returning cash to shareholders really consistently. That's something we look for A lot is not just buybacks, but consistent buybacks every quarter. And the management team talking about why they want a buyback, which is to reduce shares outstanding. Yeah, we'll invest in a company if they talk about, you know, buying back stock to offset dilution and that might make our eyes roll. But if a Dropbox is actually a huge positive where they say, look, we want to reduce share count, we want to return cash to shareholders. And when you have that combination of low valuation, high switching costs and returning cash to shareholders, we think that's a really good recipe for long term success. Even though the stock doesn't look great, the underlying numbers actually look fantastic. And honestly, that could be an opportunity where a lot of people say, you know what, This has been a dead stock for five years. Why is it going to change over the next three years? And I'd say if you extend your time horizon, if the cash just keeps coming in, like everything is going to work out. 

Bryce: [00:24:54] So I guess the follow on then is what would make you sell your shares? What do you what would you be looking for, for your thesis to break and then no longer want to hold this as part of Arch Capital's portfolio?

Ryan: [00:25:06] I don't think there's that many crazy risks to think about that are kind of obvious. I mean the competitors you kind of think about, you could not imagine a worse competitive set for job loss. That's right. So it's like maybe there's there could be like some security breach or something like that. And I think they've had I believe they had one of those a while back, but that can hurt them. But really. It's a very boring business. It's very simple, but it's very predictable. So I don't think it'll grow very quickly, which means if it gets kind of. To a crazy valuation. The math gets pretty simple to say, you know, there's better investments elsewhere. So that's kind of I mean, it's not we have some companies in our portfolio that are like they're not really. Never sells. Like if they got crazy price, we probably sell them but they're close because, you know, they consistently innovate that we kind of introduce new business lines and stuff like that. That's not Dropbox. We just think it'll give us a good return based on where where the investors currently value it. And so if it got to a certain valuation, I believe we basically have it pegged at north of 20 times earnings. If it got above that, it's not quite as attractive as probably other investments are in the portfolio. 

Brett: [00:26:25] Yeah, and the business is so simple that if really the KPIs we look at every quarter, did they grow? They're paying customers. Okay. And how does their average revenue per paying customer look okay it's growing as well. Or sometimes that doesn't grow as consistently or it's a little bit more lumpy. But if that stays consistent, the numbers are going to look good. And it's one of those where I saw we just had this conversation earlier this year where we had say, would you like a bi weekly meeting? We're kind of update on of investments and talk things out. And I talked to Ryan. I said, Look, I'm getting nervous about Dropbox. I don't know. I think they're going to miss their numbers. I was looking at small business bankruptcies or something like that because that's one of their core audience or customer bases. And then I was looking at the generated stuff from Microsoft and Google and I was like, Man, you know, they're putting out these new products out there. Maybe people are going to switch because you can do these stuff within Google Docs and Microsoft Office. And then they came out with their numbers and they look great again, or Dropbox. And I was like, you know what? I think we might just be nervous every time. And we just have to make sure, look, they're growing customers, they're growing, they're paying users. It's not going to feel great. But a lot of times good investments don't, you know, feel great when you buy them or hold them for guys. 

Bryce: [00:27:40] We're going to take a very quick break. And on the other side, we're going to talk about the Company of Love Match Group. All right. Well, welcome back. We're here with Brett and Ryan from Art Capital, hedge fund based in Seattle, and Bret and Ryan, also host of Chit Chat Money podcast. So check it out. We've got we've gone through Nelnet and Dropbox, but a company that we've spoken about on the show before and one that is quite interesting is Match Group. So let's turn to that. The ticker is MTCH And while money may not buy love, love can make money. Match Group is the owner of Tinder and dozens of other dating platforms, and it's the third largest holding in Arch Capital's fund. So most people are familiar with Tinder. But help us understand the scale of match groups dating Empire. 

Brett: [00:28:30] The scale is quite large, as you may. I guess for anyone that doesn't use dating apps, which would be, I guess hopefully everyone that's, you know, not single listening to this, the it's a little bit of a heart. They don't have like say a 2 billion and they huge number like a Facebook or YouTube would give out words on a consistent number You have a lot of people cycling through because as we all know you know you might download the app, might go on a few dates, you might have a relationship for a couple of months and then, you know, some of them don't work out. Then you come back. So it's not really a giant new number and they honestly don't give out. Muse are total users consistently, but they did say that they were just under 100 million muse at the end of last year, I believe. And then from a payer's perspective and the way they describe this as anyone who's paid for a product, I believe it's within the quarter. So say like in Q1 we had total payers and it could be people that pay for their subscription service for add ons stuff or any allocated things like boost anything else within those, and that is at around 16 million and then over half of those payers are at Tinder. So you get about a little more than half of the business is from the Tinder app, which everyone now is well aware of. And then you got about 40% at these other ones. So I hope that gives context. And then they look at revenue, it's at about $3 billion a year.

Alec: [00:30:01] Yeah, I think the key thing for people who aren't super familiar with Match Group or, you know, Bryce, who met his wife when we just started uni and never had the joy of being on a dating app is that match group. I think they own about 45 different dating platforms. The biggest, as you mentioned, is Tinder. The probably the fastest growing is Hinge. But then it's there's so many others as match.com, plenty of fish, OkCupid still tours so many. So yeah, if you use a dating app outside of Bumble, you're probably on a match group platform. Is that a fair ? Is that a fair comment? Are and any other ones missing? 

Ryan: [00:30:46] Yes, I think that's probably accurate. The the there's some that belong to spark networks, but I think Match.com basically just copied a bunch of those products and just made it better. User interface, user experience and spark networks looks kind of poised for bankruptcy here. So they have some as well. And then Bumble has one, what's the bigger of it? 

Brett: [00:31:09] It's Badoo. That's more of a thank you. It's older and we kind of think about it is there's I guess I'd call them flagship maybe or broad dating apps which basically cater to everyone. These could be the Tinder hinge Bumble. And then there's Badoo, which is kind of falling off, and then there's a bunch of niche players out there which could be, you know, they might scale up to $100 million in revenue a year or something like that. No one's really escaped too much higher. All this could be, you know, be okay for the black community in the United States. This could be chispa for Hispanic and Latino people, which is popular in United States as well. There is Archer, which they just launched, which I believe is focussed on the LGBTQ community, and there's a few others. There's one that's focussed on specific religions and those are going to be the like the niche players which Match Group owns a lot of these as well. And then you're going to have the flagships. So the flagships will make the most money. But then for certain audiences that might want to, you know, have more interest in each other, they, they offer those as well and like they like to buy and start up those as well. For example, they started up it was last year I believe, which is Sturt, which is for single parents or people you know, who are willing to date single parents. And that's something that, you know, is very specific, where it's a big thing that I guess if you're if you're going to date someone that has a child. So that's where they're investing in separate into those two categories.

Alec: [00:32:39] It is such a funny industry because, you know, we talk about network effects in investing, and this industry is one where the network effect is so pronounced. The value of the platform is enhanced by each additional single person that is added to the platform. And so you have these these giants and then you have all these real niche category specific dating apps as you were outlining. When as an investor you come to a business like this and you're analysing this portfolio of brands and this portfolio of platforms, how do you approach it? How do you think about it? Are there does your analysis really just focus on some of the big ones? Do the little ones matter from a revenue and profit and business sense? Yeah, Talk us through that portfolio of brands and how you think about it with your investing lens on.

Ryan: [00:33:34] I think with especially for online dating, where so much of the value is accrued to the big players you get, it's a huge advantage to have to if you're a like a start up app. It's a huge advantage to be in the same company as a tinder and a hinge because one, you can have access to capital to kind of quickly scale and then let the network effectively take over for yourself. But there's also the cost savings of having to share back and share back office. And then there's a lot of advantages and advantages in terms of like sharing best practices around like marketing strategy because, you know, Match Group has done this a number of times. But I think you mentioned something that's really important there, which is the network effect, really. Is so important for the scale players. I think Tinder. They don't explicitly break it out, but I think on one conference call, someone mentioned that they have 50% operating margins. When you get to a certain size that Tinder does not. You don't need to do a marketing campaign for someone to be like, Oh, you know what? Maybe I'll show I'm Tinder people. If you if you're single, you know what Tinder is because so many people are on there and you don't want to be on a maybe if you're really committed to one, you're really looking for one kind of person, like certain of the religious apps. Maybe you're willing to have less people on there, but if you're kind of the casual dater, like most of Tinder's market, you're going to go where the most people are. And so that's where the scaled players really have that advantage. And other than Bumble and Tinder, Hinge is the only one that I've seen like really successfully kind of climb that that climb to that level of scale. And I think a lot of that is just counter positioning of being an app for people that actually want to date as opposed to what most Tinder users want. So it's so. 

Brett: [00:35:33] It's a wide variety. Hey, let's not do it. 

Ryan: [00:35:35] But it's just there's a huge advantage that scale because the platform basically sells itself once you have enough users on it. And for a smaller player, it's really hard to compete with that. 

Brett: [00:35:46] Yeah, and it also goes into the revenue potential because the bigger your network effect is or the bigger, you know, with dating apps, it's a bit more complex because it's yeah, it's about people within say your 25 mile radius or it's about how active the people are on their platform or you know actually engage they are with the other you know, potential mates on there. But the more people you have in a certain geographic area, the higher you can charge for a subscription because the value is more when you can get the unlimited swipes or you get these other add on products, you can charge more for that. So the network effect is incredibly crucial. And to hit your first question on whether the niche dating apps can matter, they really do not at this stage. They give some good anecdotes about how they're growing and maybe doing, say, $50 million in revenue or $100 million in revenue, but it's not going to be material to the growth story, at least for the next five years. And even today with Hinge, it is doing about $300 billion revenue and they say they're going to bump it up to 400 million by the end of this year, or at least, again, roughly those numbers. That's not too material. I mean, yeah, it's somewhat material, but the key driver here is Tinder. Whether this still has growth in it, whether, you know, they can retain their margins, whether they are losing ground to hinge and bumble, which is kind of funny because some of the bear cases that they're losing ground to the something that they also own. But yes, the driver over the next at least three years from from a revenue perspective, mostly is going to be tinder. And whether they can retain that, you know, the monetisation I have there. 

Bryce: [00:37:26] For a guy who's never been on a dating app, I imagine that they rely on the next generation to kind of keep ticking over. Everyone wants to be on the app where the 20 and 30 year olds are hanging out. It sounds like Tinder is still the one with Bumble and Hinge, the up and comers. But are there any out there that are really different or trying to win over the next generation in a different way?

Brett: [00:37:51] Look, I'm getting to the I'm on the other side of 25, so maybe I'm missing it. So if there's anyone that's like 18, I could totally be missing that. But I do try to look at the the charts kind of the least, the free access one to say, like, what are the top ranked downloading and the dating apps. And really the again, as Ryan mentioned, hinge is the only one that's really come out of the blue over the last 5 to 10 years and taken you know gotten a lot of market share. And the thing is match group did acquire them when they were doing $1,000,000 in revenue and really tiny So I think the fact that they did that was probably because Match group was you know, own them and gave them a lot of the best practices. But there hasn't been any new player. And I think right now Grindr is also old you know someone in that category as well or they started around the same time period or got big around the same time period. And that one is a little different because it is focussed on the LGBTQ community. The I think the key what, you know, people talk about how there's kind of the legacy dating apps are, they're not apps at that point I guess services which would be match up and stuff like that. And there was just good data out that someone shared on Twitter that even people in Gen X and Boomer, I don't know if they had boomers on there, but basically older people that are still dating, they, you know, still would go on these Match.com and E harmonies and the younger people, which would basically be millennials and Gen Z, they both had very, very similar kind of top three dating apps that they used. And they were Tinder, Bumble and Hinge. So the younger people are still using the same three. And the key is that the reason there was this big switch is because the Internet platform of preference changed from desktop computers to mobile phones, and that caused a different need for the SWAT swipe feature, unlike the, you know, location stuff was unlocked, a lot of things. And I don't know whether or this will be very difficult unless it comes within Bumble or Match Group for an upstart to really take hold. Again, it's not impossible, but it would be very, very difficult for, I think, to break these network effects. 

Alec: [00:40:03] So really what you're saying is the next great dating, this shift in dating apps is going to come when we all switch to Apple's Vision Pro and we're just. 

Bryce: [00:40:13] Exactly.

Brett: [00:40:14] At that. Honestly the platform change we think is kind of a big risk if that happens because you know, it could happen. I think it's a little unpredictable, but it's a more of a joke. Yeah. Like if we all sit on Apple Vision pros all day, maybe Tinder gets disrupted.

Ryan: [00:40:28] A match group had they were experimenting with some Metaverse initiative called single town. So maybe you know. 

Brett: [00:40:37] That's a better case. That's the best case, right? 

Alec: [00:40:41] Yeah, yeah, yeah. Everyone. Everyone was experimenting with the metaverse a couple of years ago, and they've all gone very quiet on it. So. Yeah. 

Bryce: [00:40:51] Well, guys, we have reached the end. So thank you so much for your time today. We'll put some links through to Arch Capital in the show notes if any of our community want to find out more about you. Also, we'll put links through to chit chat money the podcast that you host. So but we really appreciate you joining us here on equity markets all the way from America. It's been great. We've learned a lot. Thank you so much. 

Brett: [00:41:15] Thank you, guys. It was awesome.