LOV Targets Online Dating

04/25/2014 8:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Our newest recommendation is a company that operates Web sites that connect singles, focusing on niche dating markets such as Jewish, Christian, black, deaf, or military singles, observes Ian Wyatt, editor of $100k Portfolio.

The flagship sites at Spark Networks (LOV) are JDate and ChristianMingle. JDate, targeting Jewish singles, has 84,000 subscribers. 63% of all online dates between two single Jews originate through JDate.

The newer ChristianMingle site now has 193,000 paying subscribers. In the last three years, revenues for ChristianMingle have increased from $5.8 million to $40.2 million.

The site is essentially just four years old, but it already accounts for more than 60% of Spark Networks' total revenue.

Given that nearly four out of every five people in this country identify themselves as Christian, ChristianMingle has plenty of room left to grow.

As a whole, the online dating community keeps growing. The number of Spark Networks subscribers has increased 136% in the last three years. Revenues have increased 71% during that time. Clearly, word is spreading about this upstart company.

With so many things going for it already, you would expect Spark Networks to be a Wall Street darling. Lately, however, LOV shares have been surprisingly unloved.

In fact, LOV stock has fallen 26.5% in the last year, compared with a 19% gain in the S&P 500 (SPX). The majority of those losses came in early March, after the company's fourth quarter earnings disappointed.

The stock trades at its lowest level in two years. The growth opportunity at Spark—combined with the poor share performance—has attracted at least one well-regarded hedge fund activist to the stock.

Osmium Partners, a California-based hedge fund that owns a 14% stake in Spark Networks, is actively trying to change the makeup of the company's Board of Directors.

One thing that has been a drag on Spark's bottom line is the company's aggressive ChristianMingle marketing campaign. In the short-term, the big marketing spend has prevented Spark from turning a profit. But the long-term effect could be overwhelmingly positive.

Having built up that brand awareness, Spark's management has vowed to scale back its ChristianMingle marketing spend to focus on profitability. Once the company succeeds in becoming profitable, the stock should take off.

This is a tiny company, with a market cap of just $129 million. We think the stock is a bargain at close to $5.

Mistakes have obviously been made at Spark Networks. That's why the stock has underperformed in recent years. While the future may seem a bit uncertain today, that's exactly what makes this an ideal time to buy the stock.

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