Shares of Forge Global (NYSE:FRGE), a platform that allows accredited investors to invest in private businesses, have been on a steady downward march for much of the last year. Shares of FRGE are down over 46% on a trailing 12-month basis, significantly undershooting the performance of the stock market as a whole.
Why has Forge Global dropped so much, and is the dip in share prices an A+ buying opportunity for investors?
Why Did Forge Global Stock Go Down?
An unclear timeline for net profitability and slow revenue growth explains why Forge Global share price is down. The decline has been a long and slow process, occurring gradually over multiple years.
This year, these concerns have been compounded by expectations of a weaker economy going forward, something that may very well reduce investment in the kind of private businesses Forge Global helps investors access.
Gradual cash burn has been another problem for Forge Global. While it still has enough cash to give itself a multiyear runway at current burn rates, it has reduced liquid reserves from about $207 million in 2022 to just $93 million as of the most recent reporting. Although FRGE doesn’t currently have any long-term debt, this gradual decline in cash still presents concerns.
Pressure on FRGE shares has even been strong enough that the Board found it necessary to undergo a 1-for-15 reverse stock split in April. While this hasn’t fundamentally changed the intrinsic value of the business, it may have somewhat shaken already flagging investor confidence.
This is especially true considering the fact that a split ratio of up to 1-for-50 had been approved before the 1-for-15 was decided upon, suggesting that management may have believed that the stock would still have room to move considerably lower.
While there are several factors behind Forge Global’s slow decline, the overarching reason behind it appears to be that investors have reduced their growth expectations for the company and found reason to question if or when it will deliver positive net income.
The resulting decline in the overall value assigned to the business has been fairly drastic. As recently as a couple of years ago, the market cap stood at about $590 million. Today, that number has plummeted to only about $180 million.
Q1 Earnings Were a Small Bright Spot for Investors
With that said, Forge Global did get a bit of a boost from a reasonably positive Q1 earnings report. Revenue less transaction-based expenses, the metric that Forge Global relies upon for its revenue reporting, reached a record high of $25.1 million. It also saw a 132% increase in trading volume from the previous quarter to $692.4 million.
Despite these wins in trading volume and revenue, Forge Global still posted both net and operating losses in Q1. The net loss came in at $16.2 million, while operating losses totaled $16.5 million. The operating loss was contributed to by transition costs associated with a CFO transition, excluding which the loss totaled $14.1 million.
Another negative in the report was a substantial drop in the company’s net take rate or the amount that Forge Global retains as revenue out of its transactions. In Q1, the rate dropped to 2.3% from 2.8% in the previous quarter. Even though revenues rose, this lower take rate could present a problem for Forge Global as it continues to scale and attempt to reduce its losses.
Notably in Q1 total assets climbed from $16.9 billion in Q4 to $17.6 billion in Q1, an increase of 4% in a single quarter that bodes quite well.
Is There Untapped Value in FRGE Now?
At a glance, Forge Global shares look reasonable from a value perspective at 2.1 times sales and 0.9 times book value. Analysts also project massive upside for the stock with a consensus price target of $33.60 against a current price of $14.64. It’s worth taking into account, however, that only a small group of analysts are covering FRGE, meaning that more bearish views may not be well-represented among the small number of forecasts.
The real question with regard to valuation is whether or not Forge Global is a value trap. The top line has increased on a year-over-year basis in seven of the last eight quarters, a fact that lends weight to the argument that there’s real value in the company.
Net losses, however, have only improved modestly as revenues have grown. Given the long, slow decline that the business has experienced and the obvious lack of a clear path to profitability, Forge Global may have at least some of the characteristics of a value trap.
However, that hasn’t kept institutional investors from jumping in as FRGE’s share prices have fallen. Over the last six months, institutions have bought more than double the amount of Forge Global that they’ve sold.
As a result, the rate of institutional ownership at Forge Global is nearly 50%. While this may lend some extra credibility to the stock, it’s still difficult to overlook the hard time the company seems to be having in moving closer to profitability.
Is Forge Global a Stock to Buy on the Dip?
Even with the top line bumping higher, Forge Global doesn’t have a lot of breadcrumbs leading to a buy at this time. The share price is still under threat thanks to declining cash reserves also create some worries around growth, especially under a less favorable economic climate.
Nonetheless, the stock is worth watching, not least because Q1’s performance was solid, and management has demonstrated slow improvements over the years.
At some point, it may make clear enough progress toward profitability to become attractive as an investment again. For now, though, a wait-and-see approach seems more reasonable than buying FRGE.
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.
