Futu Holdings: How To Trade This Volatile Winner (NASDAQ:FUTU)

One name that has traded wildly is an international trading exchange company Futu Holdings Limited (NASDAQ:FUTU). This is a stock we have traded at our service last buying in at $39, and also covering publicly when shares more than doubled. Futu Holdings Limited is an online brokerage firm based in Hong Kong. One thing we like is that like many other similar firms, the company’s trading platform can be accessed on any mobile device or online, and enjoys millions of customers processing hundreds of millions of transactions. While trade execution is the core business it also offers margin financing services, real-time market data and news, investment research, and analytical tools. Futu is working diligently to enhance its wealth management products to help boost revenue. Trading revenues often depend on market conditions, so there’s volatility in results. There has been mixed performance over the years but the ebbing and flowing of the stock makes it great for trading. Longer term, the company is investing heavily in itself, its technology, and future development. The company is pushing to expand globally. Most recently, it’s pushing into Singapore. We think this bodes well for future revenue growth. The company just reported earnings here on Thanksgiving, and we view the results as a buy.

The growth efforts are paying off as we’re seeing more registered and paying clients on the platform, with more assets. Once again, trading volume is dependent on market conditions. Total paying clients increased 14.2% year-over-year to 1,650,843 at the end of September 2023, while registered clients increased 11.4% year-over-year to 3,490,292. Total users were up as well but 10.1% to 21.1 million. All told, client assets increased 26.6% year-over-year to HK$468.1 billion (about $63.5 million USD) while daily average client assets were HK$480.6 billion rising 15.4%. All of this is positive growth for the company. Of course, revenues depend heavily on trading revenue which is why the company is trying to diversify out its revenue base. Total trading volume was up just 0.5% year-over-year to HK$1.1 trillion.

Well, the push to bring in more clients and diversify operations largely offset flattish trading volume growth. Futu’s total revenues jumped 36.2% year-over-year to HK$2.65 billion (about $338.5 million in USD). Margins were strong as well as total gross profit increased 28.1% year-over-year to HK$2.21 billion (about $282.5 million in USD). Factoring in expenses which in our opinion were well managed, we saw that net income was up 44.6% year-over-year to HK$1.10 billion (or about $140 million in USD). Making customary adjustments, we saw adjusted net income skyrocket 43.7% year-over-year to HK$1.16 billion (or about $148 million in USD).

Generally when we see rapidly growing revenues we usually see big rises in costs, but margins held up well. It’s completely acceptable for expenses to rise with revenues and volumes. Interest expenses were HK$288.7 million (about $37 million USD), a massive increase of 545.9% from the third quarter of 2022. The increase was mainly driven by higher expenses associated with the securities borrowing and lending business and is a direct result of global interest rates at much higher levels. This is a headwind going forward, but keep in mind, that Futu charges interest as well for its lending and margin businesses. Interest income was HK$1,504.5 million (or over $192 million in USD), an increase of 70.8% from a year ago.

Overall we saw GAAP earnings of $1.00, which beat by $0.07. From a valuation perspective, the stock is pretty expensive here at $60 per share. However, you’re paying for the growth, which is A-rated by Seeking Alpha’s quant ratings. As such, we think the company can grow into the valuation especially if it keeps pushing its global expansion, but it’s best to let the market pull back, and then do your buying. Here’s a suggested play from our traders:

Target entry 1: $57.00-$57.50 (30% of position).

Target entry 2: $54.50-$54.75 (33% of position).

Target entry 3: $52.00-$52.25 (37% of position).

Target exit: $70 if one leg, $65 if 2 or 3.

Stop loss: $45.

Looking ahead

Recent performance has been strong. On an EPS front, we’re looking for $4.00-$4.15 in EPS for the year, in which case, the valuation is not all that crazy. However, if the company does not continue its global expansion, EPS growth will likely normalize to high single digits which would cap the upside. Thus, traders need to watch developments on the expansion front to keep growth going. We think shares are a buy on a pullback based on the future growth potential and 2023 earnings. And though the valuation is stretched, it can improve into our buy range, and this is one that can be grown into.