There were plenty of COVID-induced changes dictating the way people did business at the start of the coronavirus outbreak early last year. One of the companies benefiting from these changes was Freedom Holding Corp., a US-based retail brokerage and investment firm operating mainly in the Eastern European and Central Asian markets.
As the worldwide lock-downs began in earnest late last March, and trader activity – especially in the retail investing sector – shifted more and more to an online format, Freedom Holding saw a big uptick in its business operations, notably its brokerage services and its online trading platforms, QUIK and Netinvestor.
FRHC share price also enjoyed an enviable run-up in 2020 as this increase in user traffic grew, resulting in the company eventually clocking a record high during February of $61.77.
FRHC Revenues & Earnings Growth Is “Awe”some
Its client base also grew from 133,000 customers in 201 to 229,000 over the next year.
Throughout the quarter, revenue from fees and commissions were up to $74.33 million compared to just $20.59 the previous year, and the firm’s net income made a staggering tenfold gain from $4.05 million in 2019 to $42.32 this time round.
Wall Street revenue estimates are bullish, with a projected figure for March 2021 currently standing at $336.1 million, growing to $588.45 million for the same time in 2022.
Many of the company’s financial metrics are fairly solid too – not surprising given Freedom’s three-figure percentage year-on-year revenue growth this quarter – but the firm’s yearly operating cash flow growth of over 730% really stands out as particularly special.
Its twelve month trailing price-to-cash flow ratio of 4.58 is an industry beater, with the sector median for other businesses in the space at more than double with a ratio of 9.84.
If you want to look for some bad news this quarter you might find it with the company’s price-to-sales multiple of 13.19 – a figure which lags the competition’s median of 3.57 by quite some way.
But to read too much into this would mean being overly pessimistic where there is no real reason to be – for instance, analysts predict the firm’s EPS will grow from $0.72 next quarter to $3.88 over the next two years, underscoring the positive sentiment that Wall Street has in Freedom Holding’s ability to generate profits for the foreseeable future.
Do Dark Clouds Loom Over Freedom Holding Stock?
Despite Freedom’s admirable third quarter earnings figures, there’s still a dark cloud on the horizon when it comes to the stock’s viability as a potential buy.
You see, Freedom’s growth might not have been as organic as some would have liked it to be. Recently, news broke that the company was incentivizing clients into purchasing Freedom’s own stock so as to have higher allocation in an IPO scheme where Freedom was granting customers the right to obtain stock in several hot new companies that were about to go public.
The specifics of this scheme are interesting.
Clients apparently had to have a certain percentage of their portfolio invested in various Freedom Holding financial products to be eligible for the IPO shares, and they were also ranked according to how much they had paid in fees to Freedom for its different brokerage services.
And this is a problem. First, it is possibly illegal to do this in the US. Indeed, FINRA, the Financial Industry Regulatory Authority, forbids the granting of shares as a kickback to promote other financial incentives.
But even if we overlook this point – and it might not apply to Freedom Holding as technically its trades are executed in Belize, which is assumed to be outside US jurisdiction on these matters – it raises the question of whether this practice is sustainable in the long-term. For example, many of the IPOs that Freedom purports to invest in are floated on the Central Asian and Eastern European markets, and it’s not clear whether interest in these companies will hold strong going forward.
Second, Freedom generates a large chunk of its revenues from the broker fees it encourages investors to pay to have access to these IPOs. If its rivals in the region decide to compete with it on the basis on those fees, Freedom’s so-far excellent revenue growth could come to a halt – and bring its share price crashing down with it.
Is Freedom Holding Valuation Fair?
A quick glance at Freedom Holding’s share price this year shows that the growth it experienced over the last eighteen months has pretty much stopped.
So far in 2021, Freedom stock appreciated less than 5% – this wouldn’t normally be catastrophic for some companies, but it runs counter to Freedom’s story of it being a high-growth, high-return business.
And those great financial figures?
Well, it doesn’t look like they’re telling the entire story, and investors should eagerly await Freedom’s next quarterly results for some additional color on where it is going as a company.
So, Is Freedom Holding Stock A Buy? The Bottom Line
There’s no denying that Freedom Holding has been on an upward trajectory since it started trading publicly at the end of 2019. But its current market price is down over 10% from its all-time high, and the question is whether this makes it overvalued still, or whether it is clinging tightly to those lofty peaks ready to soar even higher.
Freedom is a risky stock, albeit one girded with good growth numbers and with a few secular, COVID-related tailwinds at its back. But opaque business practices and a slowdown in price action should make potential investors wary.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.