Falling Physical Sales Will Squeeze Margins Yet Gold Will Persist

Key Takeaways

• Heavy reliance on acquisitions and volatile spot prices raises uncertainty about sustainable growth, with recent higher precious metal prices dampening new demand and volume.
  
• Rising competition from digital and larger online players, along with slow integration of acquired customers, threatens future margins and A-Mark's intermediary business model.
  
• Declining sales volumes, shrinking margins, rising costs, and greater earnings volatility pose significant challenges to sustainable growth despite continued high precious metals prices.

Catalysts

Operates as a precious metals trading company.

• While A-Mark is positioned to benefit from rising global inflation and currency debasement-trends that have historically fueled demand for physical precious metals and could lift both volume and transaction fee revenue-the recent quarters saw a sharp drop in physical gold and silver ounces sold and ongoing customer liquidations, suggesting that higher prices may actually be dampening new demand or shifting activity away from A-Mark's core growth market, creating uncertainty around sustainable top-line growth.
  
• Although the company has expanded its customer base significantly through acquisitions, nearly three-quarters of new DTC customers came from purchases such as Pinehurst and SGI, rather than organic growth, indicating future growth in active repeat buyers and associated net margins could stall if the acquired customer base fails to exhibit ongoing engagement or if integration synergies are slower to materialize.
  
• Even as A-Mark invests in automation and proprietary tech at its Las Vegas logistics facility to drive operational efficiency and potentially higher margins, the company remains exposed to intensifying competition from larger, better-capitalized online distributors-putting future gross profit expansion at risk if margin pressures and cost of customer acquisition continue to rise in a commoditized market.
  
• While geopolitical instability and de-dollarization can lead to spikes in precious metals demand, A-Mark's reliance on volatile spot prices for gold and silver exposes it to periods of price stagnation or reversal; should prices stabilize or decline, earnings and gross margins may compress further, as seen in the most recent quarters where revenue gains came mainly from higher prices rather than volume growth.
  
• Despite ongoing industry consolidation favoring scale, the emergence of new digital alternatives to physical bullion-including tokenized metals and blockchain-based direct-access platforms-threatens to disrupt A-Mark's intermediary role and could undermine long-term transaction volumes and profitability, particularly among younger, tech-oriented investors.

A-Mark Precious Metals Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on A-Mark Precious Metals compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming A-Mark Precious Metals's revenue will grow by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.3% today to 0.7% in 3 years time.
• The bearish analysts expect earnings to reach $95.2 million (and earnings per share of $3.74) by about July 2028, up from $37.9 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 11.5x on those 2028 earnings, down from 14.7x today. This future PE is lower than the current PE for the US Retail Distributors industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.38%, as per the Simply Wall St company report.

A-Mark Precious Metals Future Earnings Per Share Growth

Risks

• The company's revenue growth has been driven by higher average selling prices of gold and silver, but this was partially offset by a significant decline in physical ounces sold, with silver ounces sold down 39% year-over-year for the latest quarter and gold ounces down 3%-sustained volume declines could weaken future revenues even if prices remain elevated.
  
• Gross profit margin as a percentage of revenue is trending lower, as evidenced by a decline from 1.82% to 1.53% on a nine-month basis and only modest improvement quarter-over-quarter, while overall gross profit for the nine months actually declined 1% despite higher revenues-long-term margin compression poses a threat to earnings growth.
  
• Operating expenses, particularly SG&A, are rising rapidly due to acquisition costs, higher compensation, and expanded headcount integration, with a 46% surge year-over-year for the latest quarter; if integration efficiencies or anticipated synergies from acquisitions fail to materialize, net margins and overall earnings may remain under pressure.
  
• Net income and EBITDA for both the quarter and the nine-month period saw steep declines-net income over nine months dropped more than 80% year-over-year and EBITDA fell nearly 50%-reflecting both cost pressures and the volatility inherent in the core precious metals business, and suggesting long-term earnings unpredictability if these trends persist.
  
• The company faces the risk of increased liquidation by long-term holders selling into a strong price environment, which reduces the need for new product sales and dampens wholesale and manufacturing demand; if this secular pattern continues, it may further erode both revenue growth and margin expansion over the long term.

Valuation

• The assumed bearish price target for A-Mark Precious Metals is $28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of A-Mark Precious Metals'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 $63.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $13.3 billion, earnings will come to $95.2 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 9.4%.
• Given the current share price of $22.64, the bearish analyst price target of $28.0 is 19.1% 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.