Updated from 9:20 a.m. to reflect the Match Group will generate $500 million in EBITDA by 2016, not just Tinder.
While the wildly popular Tinder has yet to become profitable, its surging user base of mobile speed daters is fueling speculation that Diller will spin-off IAC's Match Group, which also includes Match.com, OkCupid and How About We, to capitalize on its rapid growth: daily active users are expected to reach 20 million next year, with monthly users numbering 40 million, said Barclays Internet analyst Chris Merwin.
Match Group may be worth as much as $5.3 billion, according Merwin, enough to convince investors that a spin-off would unlock a much higher valuation for IAC's dating websites and apps than the rest of Diller's Internet-holding company, which includes the search engines About.com and Ask.com.
"What people are most excited about is Tinder," said Merwin, who projects that Tinder alone could be worth $1.1 billion by the end of 2015, in a phone interview. "Tinder is growing the personals category as a whole."
For IAC, which sports a total market capitalization of $5.5 billion, a Match Group spin-off would provide Diller additional capital by retaining a stake of what would become a publicly-traded stock, and then selling all or part of those shares to invest in his other sites. Chief among them would be the YouTube competitor Vimeo, which saw revenue surge 30% in the third-quarter as the site reached 530,000 paid subscriptions. A rebranded HomeAdvisor, a website and app focused on home improvements, could be another of IAC's breakout hits.
The likelihood of a Match Group spin-off has been bolstered by recent moves to boost subscription and advertising revenue on Tinder through new premium features recently introduced in test markets. Tinder, which is free, connects potential partners based on location and mutual attractions. In an easy-to-use format, users receive photos of potential matches, and are given the option to swipe right to "like" a person or left to skip to other users.
John Blackledge, an analyst at Cowen who has an "outperform"rating on IAC, values Match Group as high as $5 billion and as low as $4 billion, noting that paid subscribers at IAC's dating websites rose 9 percent in the third-quarter to 3.6 million.
New premium features allow users to pay for the ability to "redo" a mistaken swipe and connect with other users beyond their own location. Unlike Match or OkCupid, Tinder may also offer IAC more ways to sell focused mobile advertising depending upon a user's profile and geographic location.
"[Tinder] lends itself to a particular type of sponsorship and advertising that I think some of our other products don't, at least now," said Match Chairman Greg Blatt in an investor conference call last month. IAC expects that the Match Group will account for $500 million in earnings before taxes and other expenses by 2016.
It was Blatt's transfer nearly a year ago from chief executive of IAC to chairman of Match Group that initially sparked expectations that Diller could be readying his dating businesses for a spin-off. Diller, of course, is no stranger to spin-offs, having successfully engineered the creation of Expedia (EXPE) - Get Report , TripAdvisor (TRIP) - Get Report and Ticketmaster, which became LiveNation Entertainment (LYV) - Get Report.
Prospects for a Match spin-off received an unexpected boost when IAC was able to show better-than-expected third quarter revenue from a redesigned About.com, a sign that its search business may be stabilizing. IAC cited a favorable agreement with Google (GOOG) - Get Report over piggy-backing onto its toolbar as one reason for improved sales at About. Search revenue in the third quarter exceeded analyst forecasts by nearly 10%.
For its part, IAC has been mum about its long term plans for its Match Group though Blatt in April did tell investors that "I don't think there's any major structural problems to do [a spin-off], meaning, if we wanted to do it."
While barriers to entry are low in online dating, success in the arena is harder than it looks. Though Tinder and Match.com have managed to attract and retain a devoted user base, Blatt acknowledged that the former may be cannibalizing some of the latter's business. Match, which began as a website, introduced its own app in April, with more than 50% of its online users going mobile.
But Match's engine is clearly in Tinder which is expanding its mix of paid and free platforms, innovations that are likely to boost revenue for the group in the coming quarters, said said Kerry Rice, an internet analyst at Needham and Company. International growth, he added, could also increase Match Group profits as dating apps extend outside the U.S.
"Tinder is a huge traffic source and one that they have just rolled out monetization efforts for in international markets," he said. "Investors are looking for businesses withnice growth as well as profitability."
If Diller decides to spin-off IAC's Match Group, investors could have a chance to grab both.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.