Why Futu Holdings Stock Fell By 9% (NASDAQ:FUTU)

In October, a month before Futu Holdings (NASDAQ:FUTU) posted quarterly results, the stock traded in the mid $35. In December, FUTU stock benefited from a rare combination of renewed bullishness for China-based technology stocks and Futu’s Q3/2022 report.

Futu shares peaked at over $70 on Dec. 14 before pulling back sharply. After wide price volatility in the last three months, should investors keep this digitized brokerage and wealth management platform? Its prospects depend on the health of China and Hong Kong’s capital markets.

Strong Q3 2022 Growth For Futu

In the third quarter, Futu posted strong paying and registered client growth. Paying clients grew by 23.8% to 1,444,955 while registered clients increased by 21.4% Y/Y to 3,132,800. While revenue grew by 11.5% Y/Y to $247.9 million and EPADS was 68 cents, Futu reported total client assets falling by 12.8% Y/Y.

Daily average revenue trades or DARTS fell by 22.3% Y/Y to 448,309. In addition, clients borrowed less. Margin financing and securities lending balance fell in the quarter.

Mr. Leaf Hua Li, Futu’s Chairman and Chief Executive Officer, said that client additions slowed in Hong Kong due to a sluggish equity market. The company also saw limited traction in its promotion of silver bond. Trading volumes fell amid deteriorating market sentiments in all sectors. Fortunately, Futu offset lower trading volumes in technology names with positive investor interest in leveraged and inverse ETFs.

Investors may infer that the market’s consistent trending patterns help its ETF business. Traders are more willing to hold specialized ETFs that hedge against a sustained market trend. They will extract bigger gains using leveraged instruments.

Opportunity

Futu’s margin business benefits from the interest rate hike cycle. In the first quarter, client deposits grew. This is now adding more meaningfully to the company’s interest income in the current fourth quarter.

Should the sustained downtrend end and volatility grip markets, Futu customers will increase their average cash balance. This will increase the company’s interest income in Q4.

Throughout the year, Futu added customers from Singapore. However, challenging market conditions may slow acquisition rates. The stock’s recent weakness suggests that investors are bracing for a slowdown in trading volumes.

Related Stocks

Robinhood (HOOD) is an online brokerage whose stock lost momentum. Shares failed to break out above $10.00. It tried unsuccessfully since August to do so. FTX’s Sam Bankman-Fried’s purchase of HOOD stock borrowed from Alameda is a unique risk Robinhood.

Instead of comparing Futu to Robinhood, investors may look at Charles Schwab (SCHW) instead. The stock trades at an unfavorable valuation, yet shares are holding the $80 level. Schwab scores an “F” on value. It has strong profitability and growth:

Robinhood has good value and growth, but weak profitability. The site’s foray into building a crypto wallet and trading exchange will not pay off.

Investors have no appetite for cryptocurrency exchanges. After many bankruptcies and fraud cases in the industry, Robinhood’s crypto project costs will weigh on its prospects.

Above: Futu stock performance compared to Charles Schwab and Robinhood.

Risks

Futu attracted quality clients in Singapore. It launched targeted marketing campaigns around mutual funds, as Investor Relations Chief Daniel Yuan explained. This appealed to new customers as market volatility increased. The effectiveness of this marketing effort may weaken as market conditions worsen in 2023.

The U.S. lifted Futu’s trading volume in the quarter. However, challenging market conditions will hurt customer activity in the U.S. and Asian markets. Futu will need to keep acquiring customers to achieve net asset inflow. Its business model is not immune to a weak stock market.

Futu shareholders are already adjusting for potential disappointments. The stock fell by 9.23% on Dec. 28. Futu’s stock grade is very good overall. However, it has a C+ valuation grade. This suggests that the stock is at risk of falling and trading in the $40 – $50 range in the next few months.

Outlook

In the near term, Futu will report slower customer additions during the holiday period. Clients are less willing to increase assets and open accounts during the holiday period. When the company reports Q4 results, expect client acquisition costs to increase. The firm will forecast a longer payback period from CAC.

After seasonal pressures end, Futu will need investor sentiment to improve. After the S&P 500 (SPY) lost 4.86% in the last month and the Nasdaq (QQQ) fell by 8.00%, investor sentiment is firmly negative. It will get proverbially worse before it gets better.

Price Target

Futu’s quant rating shifted from neutral to buy:

The quant system has yet to flash a strong sell warning. Investors will need to wait until the fourth quarter earnings report before re-forecasting the earnings outlook for 2023.

Analysts have a $65.46 price target on Futu:

Risks are rising that Futu will revisit the high $40s before it resumes its uptrend to $65.00. The stock market sentiment deteriorated quickly in December. Federal Reserve Chair Jerome Powell said that interest rates will not fall in 2023. This hurts the attractiveness of stocks over cash and bonds.

Your Takeaway

Investors who bought Futu in June earned 33% in gains. It returned up to 50% to investors who happened to sell at the 52-week high. In the last month, selling momentum accelerated unexpectedly. Futu shares fell 9% because sentiment turned negative. Investors should brace for this negative momentum to continue through January 2023.

Chinese New year in late January could slow stock trading volumes. After the seasonal quarterly slowdown ends, Futu could resume its steady growth. When that happens after next February, investors will accumulate Futu shares.