Cupid (CUP)

Going dutch

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.

7 Replies to “Cupid (CUP)”

  1. red.

    “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.”

    IMHO, an investor’s long run fate is determined by what s/he does when the overall market has risen to more normal levels. There are (still) cheaper, higher quality businesses available in the UK: Camellia, Pilat Media Global, Elektron, Security Research Group etc.

    • CantEatValue

      http://www.investegate.co.uk/elektron-technology-(ekt)/rns/directorpdmr-shareholding/201201180700227333V/

      EKT may be cheap but there’s massive corporate governance risk (like Cupid, I guess) as you can see from the RNS above (which is when I sold out, thankfully).

      Can you explain more about your logic re:SRG? I make them to have ~£7m of net cash against a market cap of ~£18m now (post tender). Are you comfortable with their earnings power in the future given the one-off nature of their last degree of profitability? How have you valued them?

      • red.

        Sorry, I meant Belgravium not Elektron. http://quinzedix.blogspot.com/2013/03/trust-deficit.html
        Bad companies prey on my mind and theirs are the first to pop out when I’m naming names. Ask Lewis, he’ll tell ya.

        SRG. I’ve looked at it: Total Enterprise Value = 23m, average segment profits (packaging, property information, specialist electronics) 2006-2011 = 2.36; less 450K in central costs and income tax=> 7% yield. That’s the worst case. Not much has to go right to make a dramatic impact on the value of the shares. My bet would be on the property information search segment.

        Goals Soccer

        On the continent, of course, there are plenty of no-brainer bargains to be had.

  2. Sidekick

    It’s so tempting seeing a high growth stock trading at a PE of 5. Have to say it’s taking a lot of will power to turn this one away, but I think it’s right to say no.

    A quick google brought up plenty of reviews of their website which are universally negative, like this http://www.sitejabber.com/reviews/www.cupid.com

    The company is accused of having an absurdly complicated unsubcription process which means customers are often charged for a month that they didn’t want. I would guess if they rectified this their revenues would take a big hit.

    You’ve got to ask yourself too, why do they have so many registered domains? In this industry the size of membership is important so it would be better to operate a smaller number of sites.

    Still tempted given it’s so cheap but Id rather own a business that provides a valuable service, rather than tricks and fleeces customers.

  3. Lewis

    Thanks to both of you, you both bring up good points – don’t be deceived by the numbers (if the business is dodgy or doesn’t add value for customers, revenue isn’t indicative of economic surplus, and hence isn’t sustainable), and don’t relax your criteria because the market is going up. Having started investing in what was, in hindsight, a very good time, I suspect I’ll continue to be tested on those as I try to avoid comparing everything to what I thought was normal a few years ago!

  4. Lewis

    A slight update – I didn’t realise just how hated this company was! Reviews are dire, the legal issues go further than I expected, and I think I gave the company too generous a go the first time around.

    It might sound unscientific, but it’s probably the reviews that bother me most – I know very few people write positive reviews – after all, if you’re motivated enough to write about something, it’s probably negative – but even the other dating sites that I immediately think of have nowhere near the same level of vitriol.

    Revenues are unsustainable if they’re based on misleading customers, and that’s the impression I’m getting. My title post above seems extremely over-generous to a company I now consider to be deeply flawed.

    (not that this means it’s necessarily a blow-up. Sometimes inherently dodgy companies can keep the wheels turning for long enough to churn out decent money in the interim!)

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