Rapid Passive Shift And Digital Rivalry Will Cripple Future Profitability

Key Takeaways

• Accelerating shifts to passive strategies and digital advice threaten Victory Capital's active management model, pressuring fees, inflows, and long-term revenue growth.
  
• Heavy dependence on acquisitions and lagging ESG offerings heighten operational risks, integration costs, and client outflows, undermining earnings stability and profitability.
  
• Strategic acquisitions, ETF growth, strong investment performance, and disciplined capital deployment are boosting diversification, earnings stability, and margin expansion.

Catalysts

Operates as an asset management company in the United States and internationally.

• The continued and accelerating shift toward passive investment strategies such as ETFs and index funds threatens to erode Victory Capital's actively managed assets, putting persistent pressure on fee rates and driving reduced revenue growth in the medium and long term.
  
• The rapid adoption of digital advice and robo-advisory solutions is expected to bypass traditional asset managers like Victory, reducing demand for both established investment vehicles and high-fee active products, which will negatively affect future organic inflows and compress net margins.
  
• The anticipated generational wealth transfer to Millennials and Gen Z will likely favor low-cost, ESG-focused solutions; Victory's reliance on traditional active management and slower ESG product rollout could increase client outflows and stall AUM expansion, thereby limiting long-term earnings growth.
  
• Heavy reliance on inorganic growth through acquisitions, such as the recent Amundi transaction and the stated intent to pursue further large-scale deals, raises operational integration risks, potential shareholder dilution due to increased share issuance, and unpredictable costs, all of which could sharply depress future net margins and drag on earnings stability.
  
• Ongoing industry-wide fee compression and intensifying regulatory and compliance burdens will drive up expenses and reduce profitability for mid-sized managers; as Victory's scale and variable cost structure become less of an advantage, this will likely undermine the company's ability to sustain elevated net margins and generate consistent free cash flow.

Victory Capital Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Victory Capital Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Victory Capital Holdings's revenue will grow by 20.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 32.9% today to 50.7% in 3 years time.
• The bearish analysts expect earnings to reach $787.9 million (and earnings per share of $9.32) by about June 2028, up from $295.1 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 7.2x on those 2028 earnings, down from 14.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 3.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Victory Capital Holdings Future Earnings Per Share Growth

Risks

• Expansion through the Amundi acquisition significantly increased Victory Capital's scale, diversification, and global distribution, positioning the firm to generate higher recurring revenue streams and improve earnings stability over time.
  
• Victory Capital's rapid growth in ETFs, with a 28% increase in ETF assets under management in the quarter and further launches planned, aligns with the secular trend favoring ETF and multi-asset solutions, supporting organic revenue and profit growth.
  
• Enhanced operating leverage is evidenced by the company's ability to improve margins even as it absorbs integration costs, with variable expenses comprising more than two-thirds of operating costs, which should help protect net margins as AUM grows.
  
• Robust investment performance, with over 67% of assets rated 4 or 5 stars by Morningstar and sustained three
• and five-year outperformance, is likely to attract and retain client assets, supporting higher long-term revenue and earnings.
  
• Strong balance sheet health, including growing cash, reduced leverage, and access to undrawn credit, enables disciplined capital deployment for further strategic acquisitions, which could accelerate AUM growth and drive increases in both earnings and net margins.

Valuation

• The assumed bearish price target for Victory Capital Holdings is $61.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Victory Capital Holdings'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 $94.0, and the most bearish reporting a price target of just $61.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $787.9 million, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $62.16, the bearish analyst price target of $61.0 is 1.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.