Competitive Pressures May Challenge Future Revenue Growth, But Technology Integration Will Support Profitability

Key Takeaways

• Intense competition and consolidations may hinder HUB24's revenue growth and pressure recurring revenue streams.
  
• Inefficient cash utilization and breakeven delays in acquisitions could impact HUB24's capital deployment and earnings potential.
  
• Significant growth in funds under administration, market share, and technology integration positions HUB24 for sustained revenue growth and enhanced profitability.

Catalysts

A financial services company, provides integrated platform, technology, and data solutions to wealth industry in Australia.

• Concerns about HUB24's recurring revenue streams from existing clients could arise if the industry experiences further competitive pressures or licensee consolidations, potentially impacting future revenue growth rates.
  
• Costs related to security, data infrastructure, and automation could compress net margins if not managed effectively, as the company continues to invest in tech solutions to meet regulatory and customer needs.
  
• HUB24's substantial cash balance might not be fully optimized for growth or shareholder returns, leading to potential inefficiencies in capital deployment and impacting earnings potential.
  
• The dependency on increasing cash balances to maintain revenue margins is uncertain, given fluctuating market conditions and customer preferences, which could impact future profit margins.
  
• Delays in achieving projected breakeven for new acquisitions like myprosperity could affect the company's earnings growth if these ventures do not scale as anticipated, reflecting on EPS estimates.

HUB24 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HUB24's revenue will grow by 17.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.4% today to 22.9% in 3 years time.
• Analysts expect earnings to reach A$121.4 million (and earnings per share of A$1.49) by about February 2028, up from A$47.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$137.3 million in earnings, and the most bearish expecting A$106.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.8x on those 2028 earnings, down from 140.3x today. This future PE is greater than the current PE for the AU Capital Markets industry at 21.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.76%, as per the Simply Wall St company report.

HUB24 Future Earnings Per Share Growth

Risks

• HUB24 has achieved a large increase in funds under administration and a solid financial performance, highlighted by a four-year compound annual growth rate of 57% for funds under administration and similar growth rates for revenue and EBITDA. This indicates a strong revenue growth trajectory.
  
• The company has seen record inflows and substantial organic growth, specifically 62% year-on-year flow growth, which suggests strong future revenue potential.
  
• HUB24 has gained significant adviser market share, growing from 10% to 29% of financial advisers using the platform in four years, contributing to consistent revenue growth.
  
• The integration of technology solutions, including Class and myprosperity, aims to drive efficiencies and enhance service offerings, likely impacting profit margins positively.
  
• Continued investments in innovation, data infrastructure, and client-centric products, along with industry accolades and satisfied advisers, bolster HUB24's prospects for maintaining strong net earnings and profitability.

Valuation

• The analysts have a consensus price target of A$65.069 for HUB24 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$80.0, and the most bearish reporting a price target of just A$29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$529.3 million, earnings will come to A$121.4 million, and it would be trading on a PE ratio of 52.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of A$81.63, the analyst price target of A$65.07 is 25.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.