Is FUTU Stock A Buy?

Investors who are interested in getting involved in various kinds of finance and technology holdings can look at buying into Futu (NASDAQ: FUTU) a fairly new company that has seen its share prices rise precipitously since its founding in 2019.

Futu was the first Asian IPO of its kind in 2019, with a debuting share price of $12. The IPO was underwritten by Goldman Sachs (GS), UBS and Credit Suisse.

After a little bump, shares languished until March 2020, when Futu stock price began its steep upward climb to current values. For buy and holders, Futu has already generated its share of profits – but whether to get involved in the company now is a separate question.

Futu 101

Futu is involved in brokerage activities. It’s commonly been called the Robinhood of Asia.

What else does it do? One example is securities lending, where Futu will allow investors to trade on future values and provides particular derivative contracts.

Futu reported in recent months that its securities lending operations were up 83% year-over-year in the second quarter of 2020. That alone shows that quite a bit of the brokerage’s activity is around this type of transactional service.

In addition, Futu offers margin financing, helping users to trade on the margin. It’s a risky activity, but one that many investors, especially larger ones, have an appetite for in today’s market.

Is Futu Stock A Buy? The Fundamentals

To really evaluate whether Futu is a firm to buy into, it’s important to understand the history of the company.

Futu was started by Leaf Li, formerly an employee of Chinese tech conglomerate Tencent (TCEHY). Tencent, a familiar brand name in global news and in fintech, is well known as a top provider of video game services, online portals and more in the enormous Chinese market.

As a mass affluent class arises in China, there is more demand for sophisticated financial offerings and technology services like these.

“We generated higher interest income from initial public offering (IPO) financing due to an active Hong Kong IPO market, higher bank interest income due to higher idle cash balance from clients as well as higher margin financing interest income due to the increase in daily average margin financing balances,” Li said last August, explaining the path that the company has taken.

With this in mind, it’s partly the pedigree of Futu’s origin that makes it attractive to a lot of investors. There are also some interesting metrics – FUTU has annual sales of around $136 million, with a trailing price-to-earnings ratio of $82.60 and a total market capitalization approaching almost $10 billion.

Other analysts point to a different reason to applaud Futu’s track record by the numbers: in reporting in December, Reymerlyn Martin at Insider Monkey noted that FUTU is held by 15 different hedge funds, which makes other types of investors give more credence to its appeal.

If big fund managers are gung-ho to get FUTU as a fundamental holding, the rationale goes, what’s good for the goose should be good for the gander, too. The access to FUTU as a “normal” tradable equity probably helps, too, as funds themselves require maintenance fees and more.

Futu Stock Is Volatile So Brace Yourself

One of the biggest risks of holding any recent IPO after a wild run is that its fortunes can deflate as quickly as they soared.

Looking at moving averages and more, investors can see how quick growth of equity prices propelled Futu to notoriety and furnished its reputation in its corner of the fintech market.

But as the old saying goes, what goes up must come down, and Futu will have to meet a high bar to continue providing those gains.

Futu Sits In A Viciously Competitive Industry

Another major hurdle facing Futu stock owners is the competitive landscape.

This type of finance, brokerages offering margin trading and similar services, is a flat playing field across the globe. Companies don’t have to be positioned geographically next to investors in order to offer services. National standards and laws aside, there is quite a lot of international competition in this type of industry.

A number of months ago, for example, experts described a securities lending market worth $2.6 trillion, with the market share of all U.S. firms at 55%, leaving Chinese companies to share 45% with any other brokerages around the globe at that time.

(Total market value continues to change: for instance, a survey at the end of 2019 saw global activity estimated at $2.8 trillion.)

The point is that there are many big players in digital brokerage – from Fidelity and BlackRock to the likes of Futu and other Chinese firms, not to mention all of those other professional desks attached to other national economies.

Investors would be well served to consider the saturation of these markets: whether a glut of services will eventually outstrip the growth of the community of investors poised to buy in.

In any industry like this, which is filled by powerful and important players, distinguishing one from another is a key to long-term success.

Bottom Line: Is Futu Stock A Buy?

The bottom line is that Futu is a buy if you feel that this particular brokerage service will be well positioned to operate in a future where more investors become interested in taking advantage of these markets.

In a major way, Futu is tied to Leaf Li’s star.

“We leveraged technology to change the landscape.” Li said in a Financial Times interview in November.

Reading accounts like these shows how Li took a bet on his own ingenuity, untethering from an established blue chip to start something new. It already looks evident to many traders that Li “made something” of his off-branching. The question is how FUTU will fare in the future.

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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.