This article was written by John Snowden and published in The IRS Report in December 2011

Cupid: a global leader in online dating

Rupert Murdoch and News Corp bought MySpace for $580m and with it acquired some 22 million users. At the time Facebook had only 6 million users. Moving ahead six years to 2011, News Corp sold its investment for a paltry $35m to register a thumping 94% loss.

At least Murdoch had the courage to face reality and cut his loss. On a positive note, he did have the foresight to see the potential of a "social media" investment way back in 2005. MySpace turned out to be a classic binary bet with major downside risks but enormous upside potential. ITV suffered a similar experience by buying Friends United for £175m in 2005 and selling out at £25m in 2009.

Cupid plc falls into the social media category as it is an online dating company. I have a feeling that this type of company will not unduly suffer the pangs of a recession as long as it has able management. This certainly seems to be the case so far.

Incorporated in 2005, Cupid is a Scottish company with its main areas of original operation in Scotland. It floated on AIM in June last year as Easydate plc and raised £10m from a number of UK institutional investors. The company name changed to Cupid plc on 14th January 2011.

CEO Bill Dobbie and his board set themselves the task to find strategic acquisitions and start geographical market expansion. On Valentines Day 2011 the group made a geographical expansion to India by acquiring IndianDating.com and several related domains for a total consideration of $200,000. The sites had 600,000 dating and matrimonial site members. The previous owner will continue to provide consultancy but the sites have moved over to the Cupid platform. The deal widens the company's role as a niche dating consolidator as well as providing an additional foothold in the US market.

The results for the year to end-December 2010 showed a huge stride in pre-tax profits as they soared to £4.16m from £983,000. Revenues checked in at £25.7m against £8.5m and international expansion was 42% of fourth quarter revenues. The previous acquisitions of Allegran, once Britain's largest dating agency, bought in April 2010, and Cupid in September 2010 continued to perform well, helping the cash position at the year end grow to £6.0m from £0.2m for the previous year.

The expansion continued throughout the summer with an entry to the French dating market by buying the domain site cupidon.com for £175,000. The company also gained a foothold in the German market by buying a 75% stake in OnlineLiebe GmbH and WomenWeb.de for EUR2.75m. These two Munich based companies are run by Andreas von Maltzan and his team through his technology and media company Media Ventures GmbH. He will stay with the company and provide a multi-million euro billboard advertising campaign.

September saw a continental move to Rio de Janeiro, Brazil as Cupid spent $0.75m on a traditional online dating site and a second dating site for single parents both under the ownership and management of Edgard Nogueira, who will continue working with the company for at least six months. The sites have a combined membership of 1.4m members.

The strategy of geographical expansion over the last year has resulted in Cupid having a small footprint in 39 countries with over 34 million members, who in the half year period to the end of June generated revenues of £25 million.

The great difficulty with social media companies is to generate profits from the revenue streams, but Cupid is doing it. In the half year to June 2011, revenues increased by 189% to £25.4m with UK revenues ahead by 68% to £11.9m. EBITDA increased by 137% to £5.7m against £2.4m while the cash position had risen from £6.0m to £8.4m. Revenues from France and more recently from Spain and Italy strongly contributed to European growth.

Just as I was about to summarise, the company issued a pre-close period trading update ahead of the year-end (December 31st). It said results will be up to market expectations as the company has continued to perform strongly and profits will be well up on last year.

During the last six months online market expenditure has seen a considerable increase which now includes direct advertising on TV. This should ensure that growth in user numbers for 2012 remains underpinned in both Europe and the recent acquisitions in Brazil and Germany, which have now been integrated into the Cupid platform.

The shares have quadrupled in the last 18 months and I expect this and more to happen again once the general market has found a solid base upon which to build.

The market volatility and general downturn in the markets this last month have had an adverse effect on my select portfolio. I am please that many of the shares had a lot of fat on them and have so far the stop-outs have been few.

I reported in the last issue that Digital Barriers was on the cusp of the stop but I advised waiting for the results which were duly reported. The losses have widened but Digital was virtually a start-up situation so this was not unexpected and the very experienced management remain focussed on the medium and longer term potential. The share price was steady at 128p in fromt of the results and had a small run in anticipation, no small feat in these markets, and remains 30p higher on the month. The half-year figures are detailed in the update on page 8.

Iomart, the cloud computing, is due to report at the end of November and whilst the timing of my August feature was not brilliant, the shares have moved up from just under 100p, showing a 25% appreciation on the month. The gold play Centamin Egypt has recently been hit by further unrest in Egypt and is nearing the stop. Hopefully, there will be some recovery - after all, many mines and open pit operations take place in politically insecure regions in the world.

The manufacturing companies have taken the brunt of the losses and our number one winner Cape was gain-locked ahead of their "margins squeezed" statement. The latest 6% fall in UK manufacturing figures will not improve sentiment.

The oil exploration companies have been hit too and EnQuest was stopped out ahead of the October issue to book a 2% loss. However the share price has since remained steady around and above the stop level and I would like to reintroduce the company back into the portfolio if the share price falls into the lower 80s as its remains the largest independent oil producer in the UK North Sea.

Recently, Faroe Petroleum dipped marginally below the gain lock price of 137p, closing below the gain-lock on 22nd November, so for the moment we will discontinue coverage and book in a profit of 20% against the original write-up price of 117p.

I hope there may be some sort of rally over Christmas and the New Year but do not expect a sea of blue. This crisis will take a long time to get out of and one must take a long term view. I hold just one long-term equity holding in the form of Iomart and I am pleased to say that my small pension fund has remained at 60% cash, around 20% in bonds, 12% America  and 8% Europe.

When my fingers itch to use some of the liquidity, I usually turn the other way and open a small spread bet position on the Footsie or the Dow with a tight stop-loss.

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