Something I suspect lots of investors have to grapple with is the seemingly age old question of whether it’s appropriate – or even, if it’s an issue at all – to invest in companies you have concerns about ethically. Tobacco and arms companies are the ones that always seem to generate debate online. Purely in the interest of getting away from that and trying to generate a warm fuzzy feeling for investors, then, AIM-listed Cupid caught my eye today. Sadly, the inner serenity granted from your money creating love isn’t quite all it’s cracked up to be – the online dating-site operator has seen its share price plummet recently over allegations of dodgy practices. Oh well. It’s down to 77p from the 200p it’s been sitting at for most of the year. This sort of ongoing saga always makes valuation difficult, but at a price like this I’ll give it a try. My approach will be slightly changed from usual, since the company has a particularly short history and assets which are (as you might expect from an internet company) hard to quantify.
Firstly, then, the bad news: and this BBC report sums it up nicely. Essentially, the accusation is that the dating sites run by Cupid PLC. engaged in practices which, while probably not illegal, would by most standards seem to be deceptive to customers. Mysterious messages which can only be read after paying for membership, which then seem to disappear with their writers expressing no further interest, for instance. Obviously, I have nothing to add to the evidence for or against this. Cupid have denied it twice in RNS statements, which they would, of course. I approach the accusations and news article with an attempt at logic and even-handedness. Given how used these sites are, what are the odds that some users have experienced, purely by chance, a glut of messages in their membership trial period followed by little afterwards, leading an impression of them being led on by the website? This seems perfectly probable. The BBC claims they had 11 independent complaints. Given how few people would complain to the BBC about it given the nature of the business, the number that felt it might have happened to them is probably far larger. On the other hand, noting that I doubt it’s specifically illegal, I can see – even if the board weren’t involved – how practices like this might have been incentivised. It might have happened, it might not, with all the flavours in between – legality and ethics are rarely black and white when it comes to business.
Bearing in mind that ambiguity, one has to value Cupid with an eye on the risk that the board’s appointed audit finds them guilty as charged, so to speak. The damage, I would have thought, should be mostly reputational. Given previous media interest, one would expect another nice news slot (I remember seeing the original story on the 6 o’clock news) – which hardly sounds good for business. I have my doubts about whether it’ll be as destructive as the price might suggest, though. Given their nebulous operating structure – they have lots of different sites, based on lots of different niches and interests. The only dating site I know of and assumed would be owned by Cupid PLC was OkCupid, but apparently they don’t even have that one – their eponymous site is simply cupid.com. They also operate all around the world, as far flung as Brazil and the US, and with lots of European operations. Over 50% of their revenue is generated overseas.
I wonder if all this negative news is superseding more important information. In Cupid’s latest trading update, notably post all the previous stuff coming to light, they report revenues up 20%, a still significant cash pile and optimistic prospects. The pessimistic might feel it’s positive momentum, and that when the negative news hits again, Cupid will take a nosedive. I’m less convinced.
Stripping all that away, at its core, this seems like a great example of what intellectual property companies can be. They’ve taken a concept – dating – and honed it; there’s clear and obvious synergies between datingforparents.com and uniformdating.com, but there’s also an obvious reason to keep them separate. The internet allows, at relatively low cost, the creation of these ultra-personalised businesses. With the back-end software already developed, and all the mobile shenanigans sorted, it’s easy for Cupid to expand – which they have done quite notably – but, almost paradoxically, there’s another factor which means their business has a sort of protection from competition from others. There is about a classic a network effect at play as you could find here – dating sites need people to be attractive to new entrants, and the more people onboard, the more attractive it seems. If Cupid can segregate and dominate individual markets, there’s unlikely to be any real incentive for customers to move.*
I’m waxing lyrical on the speculative side of things there, because Cupid isn’t a company you can value like the manufacturers I’ve been looking at recently. Its value is precisely in its intangibles, as evidenced by the tiny amount of apparent assets it has versus its impressive cashflows. I always tell myself to stay away from situations like this – that I shouldn’t look at newsflow like this, and should stick to nice, safe companies with long histories. I have a nagging feeling the outturns are tilted in an investor’s favour at this price, though. There’s big potential growth here, with the systems set up and already profitable, and at a price more akin to a business in long-term decline. Would love to hear opinions – even more out of my circle of competence than usual here!
*One thing I should note to temper myself – it occurred to me just after writing this piece that Cupid mentioned something about buying some of the assets of Friends Reunited, or something similar. Perhaps running a site based on the name – I’m not sure – but either way, it’s a helpful reminder of how ‘network effects’ can often be overstated. People do move with the times, and what seem today to be insurmountable connections between people can be overcome. The internet is littered with Myspaces and Friends Reunited.