Structural Shift Into Capital Markets Will Drive Exceptional Long Term Performance

Catalysts

About flatexDEGIRO

flatexDEGIRO operates a leading pan European online brokerage and investment platform focused on retail investors.

What are the underlying business or industry changes driving this perspective?

• Continued structural shift of European savers from deposits into capital markets, supported by growing financial awareness and potential pension reforms in Germany and at EU level, is expected to translate into sustained client inflows and higher commission revenues over time, supporting durable topline growth.
• Rising customer wealth and a maturing client base are associated with larger average trade sizes and more cross border activity, which enhances FX conversion and transaction monetization, supporting higher commission income per trade and expanding net margins.
• Scaling of new product verticals such as crypto trading and securities lending across key European markets may add incremental, partly recurring revenue streams, diversifying away from pure trading volumes and supporting earnings resilience and overall profitability.
• Net cash inflows and assets under custody provide a base for interest income and balance sheet driven products, while disciplined pricing on margin loans can help defend spreads, supporting revenue stability and net income generation in different rate environments.
• Platform harmonization, headcount discipline and lower administrative expenses can unlock operating leverage in the business model, so that moderate revenue growth may translate into proportionally higher earnings and improved net income margins.

Assumptions

This narrative explores a more optimistic perspective on flatexDEGIRO compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming flatexDEGIRO's revenue will grow by 14.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 27.8% today to 38.4% in 3 years time.
• The bullish analysts expect earnings to reach €304.6 million (and earnings per share of €2.96) by about December 2028, up from €146.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €218.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 24.7x today. This future PE is greater than the current PE for the DE Capital Markets industry at 14.6x.
• The bullish analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.05%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The recent record revenue and net income are heavily supported by unusually high market volatility and elevated U.S. trading activity, and management itself expects a normalization of both. This could reduce trading volumes, lower average commission per trade and slow revenue growth and earnings momentum over the long term.
• A structurally lower or further declining interest rate environment, combined with already implemented margin loan rate cuts and management guidance that cash levels will not keep growing at the recent exceptional pace, could compress interest income and weaken net interest margins and overall earnings resilience.
• Delays in rolling out new growth initiatives such as crypto trading to key international markets due to partner licensing issues, and the still unproven customer uptake of securities lending, mean that the expected diversification into more recurring fee streams may materialize later or at a smaller scale, limiting long term revenue and net margin expansion.
• Flat planned headcount and a strong push for operating leverage and cost reductions, including lower administrative expenses and tight personnel costs, may at some point constrain investment in technology, risk management and product innovation. This could impair service quality, weaken competitive positioning and eventually pressure revenue growth and sustainable net margins.
• Longer term regulatory and political shifts, such as changes to pension reforms, retail investor protections or capital markets rules across Europe, could either slow the structural shift of savings into capital markets or increase compliance and operating burdens. In both cases this could dampen customer inflows, trading activity and ultimately revenue and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for flatexDEGIRO is €42.0, which represents up to two standard deviations above the consensus price target of €35.0. This valuation is based on what can be assumed as the expectations of flatexDEGIRO's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €42.0, and the most bearish reporting a price target of just €24.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be €792.6 million, earnings will come to €304.6 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of €33.78, the analyst price target of €42.0 is 19.6% higher.
  
• 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.