IVZ: Operating Leverage And Expense Management Will Drive Improved Margins Ahead

Key Takeaways

• Innovative ETF growth, digital transformation, and expansion in private markets position Invesco to capture shifting investor preferences and improve operating efficiency.
  
• Strategic partnerships, modernization efforts, and disciplined cost management are expected to enhance revenue resilience, net profit, and long-term shareholder value.
  
• Ongoing shifts to lower-fee products, rising competition, digital disruption, and regulatory pressures threaten Invesco's revenue, margins, and long-term profitability.

Catalysts

A publicly owned investment manager.

• Invesco's strong growth in global ETF and index products (notably QQQ and QQQM) and ongoing innovation in both active and passive strategies position the firm to benefit from the continued investor shift towards low-cost, scalable investment options, supporting asset growth and potentially higher fee-based revenue and operating margins.
  
• The company's aggressive expansion in private markets and alternative asset offerings, including strategic partnerships (e.g., with Barings and MassMutual) and increased distribution through wealth management channels, aligns with the growing demand for alternatives and could drive higher-fee revenue streams and improved earnings resilience.
  
• Invesco's ongoing digital transformation-seen in product launches, fintech platform adoption (e.g., hybrid State Street/BlackRock implementation), and a focus on SMAs and models-broadens its reach to new investor segments and supports higher operational efficiency, positively impacting net margins over time.
  
• The proposed modernization of QQQ's fund structure from a unit investment trust to an open-end ETF is expected to directly improve net revenue and earnings by ~4 basis points due to simplified fee treatment and marketing efficiencies, providing a near-term boost to operating income.
  
• Effective cost discipline, scale-driven margin expansion, and balance sheet optimization (deleveraging, regular share repurchases, and planned capital return) suggest sustained improvements in operating leverage and net profit, further enhancing future EPS and shareholder value.

Invesco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Invesco's revenue will decrease by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 22.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $2.45) by about September 2028, up from $422.9 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 11.9x on those 2028 earnings, down from 22.9x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.3x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Invesco Future Earnings Per Share Growth

Risks

• The ongoing secular shift from higher-fee active management to lower-fee passive investment strategies and ETFs is reducing Invesco's net revenue yield, as evidenced by continued declines to 23.2 bps, and is likely to sustain pressure on its revenue and profit margins long term.
  
• Increasing industry competition in ETFs and fundamental active equity, combined with softening demand for U.S.-based active equity products (highlighted by persistent net outflows of $4 billion in Fundamental Equities this quarter), could exacerbate margin compression and adversely affect both revenue and earnings.
  
• The acceleration of digital and low-cost investing (including direct indexing, fintechs, and robo-advisors) may pose a threat to Invesco's traditional wealth management channels and AUM growth, pressuring future revenues as new generations of investors seek alternative platforms.
  
• Regulatory changes and increased compliance costs-such as those impacting performance fees in China due to new requirements-could continue to erode Invesco's traditional earnings sources, particularly in performance fees and international markets, and increase long-term operating expenses.
  
• Execution risks in expanding private market capabilities (via partnerships or M&A), difficulties achieving further cost efficiencies, and substantial ongoing implementation expenses (e.g., for technology changes through 2026) could limit improvements in net margins and weigh on long-term profitability if anticipated scale and synergies do not materialize.

Valuation

• The analysts have a consensus price target of $22.583 for Invesco 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 $29.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 8.5%.
• Given the current share price of $21.7, the analyst price target of $22.58 is 3.9% higher. The relatively low difference between the current share price and the analyst consensus 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.