Match Group (MTCH), the online dating company that owns Match and Tinder, has attracted two huge out-of-the-money put option tranches today. However, the stock is cheap at just 12x earnings after a good earnings report for Q3. As a result, this activity could be due to short-put plays for income.
This can be seen in Barchart's Unusual Stock Option Activity Report today. It shows that one tranche of over 8,600 puts were traded at the $25.00 strike price, which is well below today's spot price of $28.84. These puts will expire on December 15, 2023, or 44 days from today.
The premium received from likely short sellers who initiated these trades was 41 cents at the bid price. That means that they provide an immediate income of 1.64% (i.e., $0.41/$25 strike price).
Moreover, the number of puts that traded at this price is over 43x the normal outstanding number of contracts at this strike price and expiration period. Very unusual indeed. That highly implies that the investor who shorted these puts was likely bullish on MTCH stock.
An additional tranche of 8,675 puts was also traded at the $22.50 strike price for the expiration period ending Jan. 19, 2024. The premium received was 35 cents, implying a put yield of 1.555%. This is also well above the normal volume, since it is 33x the number of existing contracts outstanding.
It makes sense to look at why these investors seem to be bullish on MTCH stock.
Why MTCH Stock Looks Cheap
First, the company's recent earnings of 75 cents per share were in line with analysts' estimates. Moreover, for 2023, analysts forecast $2.81 in earnings per share (EPS), which puts MTCH stock on a very inexpensive multiple of just over 10x earnings.
Moreover, for next year, analysts forecast significant growth in EPS to $3.23. That lowers its forward multiple to just 8.9x. That is very cheap indeed.
In fact, Morningstar reports that the average forward price/earnings (P/E) multiple over the last 5 years was 38.77x. That implies that MTCH stock could more than triple from here if it were to trade at that forward P/E multiple.
Not only was the company's revenue up 9% YoY, but it is also producing huge amounts of free cash flow (FCF). For the first nine months of 2023 its FCF was $571 million. That represents 31% of its $1.84 billion in revenue over the same period. That is a very high FCF margin.
It means that based on analysts' estimates of $3.39 billion in revenue for 2023, the company could generate over $1 billion in FCF for the year.
Where This Leaves Investors
This implies that MTCH could be worth at least $15 billion using a 15 multiple, or a 6.66% FCF yield. Today's market cap is just below $10 billion. In other words, MTCH stock is at least 50% undervalued using this FCF metric.
Moreover, since Match Group does not pay a dividend, the above-mentioned short-put plays might provide two good outcomes.
First, it could be a way to potentially buy the stock cheaply (if it falls to the strike prices). It also provides additional income to the investor if they are long the shares.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
