Passive Funds And Digital Platforms Will Erode Margins

Key Takeaways

• A shift toward passive investing, digital platforms, and new technologies threatens Allfunds' traditional revenue streams and core intermediary model.
  
• Regulatory pressures and client concentration risks could compress margins, making long-term profitability and revenue growth increasingly challenging.
  
• Strong operating leverage, client diversification, digital innovation, and solid long-term partnerships position Allfunds for sustained revenue growth and earnings stability.

Catalysts

Operates as a B2B WealthTech company that connects fund houses and distributors in the United Kingdom and internationally.

• The accelerating shift towards passive investment vehicles such as ETFs and index funds is poised to undercut future flows and platform revenue growth for Allfunds, particularly since their business historically depended on open-architecture active fund distribution; as more assets migrate to passive products, revenue and commission income are likely to see sustained headwinds over the long term.
  
• The proliferation of direct-to-consumer digital platforms and robo-advisors threatens to bypass Allfunds' core B2B intermediary business model, increasing competition and disintermediating traditional platforms; this will likely erode future net flows, pressure fees, and materially impact both revenue growth and net margin outlook.
  
• Continued global regulatory scrutiny and transparent fee mandates are expected to intensify margin pressure, leading to structurally lower commission and spread income; as a result, long-term operating margins and profitability could steadily compress despite attempts to diversify revenue streams.
  
• Operational reliance on a concentrated set of strategic clients, even after recent diversification, exposes Allfunds to significant customer attrition risk and tough renegotiations that could sharply reduce revenue streams or require further fee concessions over the next cycles.
  
• Disintermediation risk from emerging blockchain-based fund distribution and tokenization initiatives has the potential to make centralised, intermediated platform models obsolete, causing both revenue growth and long-term earnings power to structurally decline as fund distribution value chains are fundamentally reshaped.

Allfunds Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Allfunds Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Allfunds Group's revenue will grow by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -25.6% today to 24.5% in 3 years time.
• The bearish analysts expect earnings to reach €177.9 million (and earnings per share of €0.32) by about July 2028, up from €-168.5 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 23.6x on those 2028 earnings, up from -25.8x today. This future PE is greater than the current PE for the NL Capital Markets industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Allfunds Group Future Earnings Per Share Growth

Risks

• Sustained double-digit growth in assets under administration and revenues, combined with high EBITDA margins surpassing 66%, demonstrates strong operating leverage and suggests potential for continued robust earnings and cash flow generation, which can support higher share prices over the long term.
  
• Rapid expansion and diversification of the client base, including onboarding 74 new distributors and entering new markets such as Central and Northern Europe, Asia, and the Americas, increases Allfunds' addressable market and reduces revenue concentration risk, likely boosting long-term revenue growth.
  
• Strategic investments in digital innovation, such as the launch of AI-driven analytics, subscription-based digital services, and the development of a comprehensive ETF/ETP platform, are positioning Allfunds to capitalize on long-term secular trends in wealth management digitization, potentially supporting increases in net margins and recurring revenue.
  
• Long-term partnerships with major financial institutions, reinforced by recent exclusive agreements and collaborative technology initiatives, provide revenue visibility and client stickiness that can stabilize and potentially increase future earnings.
  
• A robust pipeline of €250 billion in client migrations over the next 24 months, combined with recurring inflows and market share gains in the growing open architecture and alternatives market segments, underpins the company's ability to drive sustainable revenue and profit growth, directly contradicting expectations of a share price decline.

Valuation

• The assumed bearish price target for Allfunds Group is €5.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Allfunds Group'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 €12.86, and the most bearish reporting a price target of just €5.8.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €725.9 million, earnings will come to €177.9 million, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of €7.12, the bearish analyst price target of €5.8 is 22.8% 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.