Interest Rate Cuts And European Competition Will Pressure Profits Yet AI Investments Will Sustain Performance

Key Takeaways

• Anticipated revenue pressure from decreased interest rates and limited growth in competitive trading environments may constrain Swissquote's net margins and revenue growth.
  
• Planned technology investments and rising compliance costs could increase expenses, challenging Swissquote's profitability goals in a highly competitive market.
  
• Strong organic growth, strategic tech investments, and diversified revenue streams ensure Swissquote's robust stability and potential for sustained earnings and resilience in market challenges.

Catalysts

Provides online financial services to retail investors, affluent investors, and professional and institutional customers worldwide.

• Swissquote’s expectation of a decrease in net interest income due to anticipated interest rate reductions in currencies like the Swiss franc, USD, and euro in 2025 could lead to declines in revenue associated with interest income.
  
• The company anticipates a competitive environment in Europe, particularly in the eForex sector, could limit growth opportunities, potentially impacting trading revenue and keeping net margin growth constrained.
  
• Swissquote’s conservative forecast of net new money at CHF 7 billion in a competitive market suggests potential stagnation in growth rate when compared to previous years, which could affect overall revenue growth.
  
• The firm is planning technology investments, including AI and innovation, indicating potential for increased operating expenses and R&D costs, which could pressure net margins despite profitability goals.
  
• Swissquote anticipates that maintaining or expanding net margins might require absorbing increased compliance and risk-related staffing costs, impacting earnings amid regulatory pressures and a competitive landscape.
  

Swissquote Group Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swissquote Group Holding's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 42.8% today to 44.5% in 3 years time.
• Analysts expect earnings to reach CHF 368.7 million (and earnings per share of CHF 24.8) by about May 2028, up from CHF 294.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, down from 23.0x today. This future PE is greater than the current PE for the GB Capital Markets industry at 14.8x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.8%, as per the Simply Wall St company report.

Swissquote Group Holding Future Earnings Per Share Growth

Risks

• Strong organic growth demonstrated by the addition of 75,000 new accounts and CHF 8.3 billion in net new money in 2024 suggests a continued capability to increase revenue streams and profitability.
  
• Swissquote's technology-driven approach, combined with strategic investments in AI, positions the company advantageously to capitalize on future technological advancements, potentially improving its net margins and cost management.
  
• The company's highest ever pretax profit of CHF 345.6 million and a net profit margin of 52.3% reflect robust financial management and could forecast stable earnings, even in the face of interest rate challenges.
  
• Swissquote's diversified revenue streams, with significant revenue contributions from trading, crypto assets, and B2B services, provide resilience and potential for earnings growth despite fluctuations in any single sector.
  
• The company's cash-rich and liquid balance sheet, with a leverage ratio of 7.2% and a capital ratio of 23.5%, indicates strong financial stability that can support further growth initiatives or withstand market volatility, positively impacting future revenue capabilities.

Valuation

• The analysts have a consensus price target of CHF369.0 for Swissquote Group Holding 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 CHF500.0, and the most bearish reporting a price target of just CHF258.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF828.6 million, earnings will come to CHF368.7 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 4.8%.
• Given the current share price of CHF453.4, the analyst price target of CHF369.0 is 22.9% 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.