Freetrade Acquisition And International Expansion Will Strengthen Market Position

Key Takeaways

• Acquisition of Freetrade and improved product offerings may enhance customer base and revenue through diversified self-directed investment options.
  
• Focus on efficiency, cost reduction, and international expansion aims to improve margins and drive revenue and earnings growth.
  
• Stagnant client growth, competitive pressures, and integration challenges threaten IG Group's revenue and profitability despite efforts in new market segments.

Catalysts

A fintech company, engages in the online trading business worldwide.

• The acquisition of Freetrade provides IG Group Holdings with a stronger platform for growth in the U.K. market, potentially expanding its customer base and increasing revenue through a more diversified offering in self-directed investments.
  
• Improvement in IG's product offerings, particularly in its OTC business with new features such as IG Top Trader, could enhance customer experience and revenue retention, supporting revenue growth.
  
• The strategic focus on enhancing efficiency and culture, including reducing costs and investing in digital servicing work streams, aims to lower operational expenses and improve net margins.
  
• The extension of the share buyback program indicates a commitment to returning capital to shareholders, potentially supporting earnings per share growth.
  
• Tastytrade's international expansion, particularly in the U.K., and efforts to increase market share are expected to contribute to revenue and earnings growth as new markets are tapped.

IG Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IG Group Holdings's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.9% today to 32.6% in 3 years time.
• Analysts expect earnings to reach £373.8 million (and earnings per share of £1.13) by about January 2028, up from £363.0 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 12.3x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the GB Capital Markets industry at 11.6x.
• Analysts expect the number of shares outstanding to decline by 2.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

IG Group Holdings Future Earnings Per Share Growth

Risks

• The company faces challenges in growing its active client base, with active client numbers flat and over-the-counter active clients down by 3%, which could impact future revenue growth and scalability.
  
• There is meaningful exposure to competitive market forces, particularly in the U.S. market, where IG's market share has flatlined, potentially affecting revenue growth and profitability in these segments.
  
• The decentralized organizational model is still in its early stages and carries the risk of inefficiencies and delays in execution, which can affect operational costs and net margins.
  
• Limited progress in the company's crypto offering and a subpar product could result in missed revenue opportunities as interest in this market grows.
  
• Challenges with integrating acquisitions like Freetrade and achieving synergistic benefits quickly could lead to increased costs and impact profit margins before the expected growth materializes.

Valuation

• The analysts have a consensus price target of £11.23 for IG Group Holdings 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 £12.5, and the most bearish reporting a price target of just £7.82.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.1 billion, earnings will come to £373.8 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of £10.2, the analyst's price target of £11.23 is 9.2% 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.