Rising Compliance Demands And Stiff Fintech Competition Will Hurt Margins

Key Takeaways

• Rising compliance costs, shifting consumer preferences, and increased competition threaten HUB24's margins, revenue growth, and ability to expand in the evolving investment platform landscape.
  
• Lagging technological innovation compared to global peers risks adviser and client loss, operational inefficiencies, and reduced long-term profitability.
  
• Strong demographic trends, digital transformation, and adviser adoption are driving sustained platform growth, operational leverage, and ongoing improvements in market positioning and profitability.

Catalysts

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

• Compliance costs and operational burden are positioned to continually rise as a result of increased data privacy and cybersecurity regulations, which will place significant pressure on HUB24's operating expenses and constrain its net margin expansion in the future.
  
• The growing consumer preference in Australia for direct indexing and self-directed digital investment platforms threatens to erode HUB24's traditional platform growth, potentially slowing funds under administration and reducing revenue growth sustainability.
  
• Prolonged periods of lower or volatile interest rates will compress platform fee and revenue margins, as evidenced by ongoing downward pressure on retail revenue margins and a shift in customer money allocations to lower-yielding assets, directly hurting top-line growth and net earnings.
  
• Intensifying price competition from larger fintechs and banking incumbents, in combination with a highly concentrated adviser network, increases the risk of fee reduction and adviser churn, both of which could lead to margin contraction and unstable revenue.
  
• The pace of technological innovation by global peers outstripping HUB24's investment capacity in AI and automation could see the company fall behind, making it vulnerable to adviser and client loss, resulting in weaker long-term earnings, increased churn, and loss of operational leverage.

HUB24 Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on HUB24 compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming HUB24's revenue will grow by 15.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.1% today to 23.0% in 3 years time.
• The bearish analysts expect earnings to reach A$128.6 million (and earnings per share of A$1.58) by about July 2028, up from A$58.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.7x on those 2028 earnings, down from 144.4x today. This future PE is greater than the current PE for the AU Capital Markets industry at 15.5x.
• 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 7.61%, as per the Simply Wall St company report.

HUB24 Future Earnings Per Share Growth

Risks

• Aging demographics and increasing retirement wealth in Australia are driving persistent growth in demand for superannuation and wealth management platforms, which could continue to expand HUB24's addressable assets under administration and support long-term revenue and earnings growth.
  
• The ongoing shift from legacy systems to cloud-based, modern platforms is accelerating due to digital transformation in financial services, positioning HUB24 to benefit from new client inflows, greater platform stickiness, and increased operational leverage, positively impacting both revenue and net margins.
  
• The company's expanding adviser relationships and strong rate of adviser adoption indicate rising market share, greater net inflows, and a growing per-adviser funds under administration metric, all of which directly support elevated group revenue and sustainable earnings growth over the long term.
  
• Continuous investment in technology, automation, and AI-driven solutions is enhancing HUB24's operational efficiency and product capability, which could further increase operating leverage and widen EBITDA margins as the business scales.
  
• Heightened regulatory and compliance requirements are encouraging adviser migration toward platforms with advanced reporting features and robust governance; HUB24 is consistently winning industry awards in these areas, which strengthens its market positioning and could underpin stable or rising revenue streams and margins over time.

Valuation

• The assumed bearish price target for HUB24 is A$38.35, which represents two standard deviations below the consensus price target of A$86.53. This valuation is based on what can be assumed as the expectations of HUB24's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$115.0, and the most bearish reporting a price target of just A$31.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$560.5 million, earnings will come to A$128.6 million, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of A$104.78, the bearish analyst price target of A$38.35 is 173.2% 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.