Future Holdings (NASDAQ: FUTU) soared after posting strong quarterly results. This gain is not a victory for investors seeking capital gains by holding and accumulating discounted stocks. Readers will correctly say that in September 2021, FUTU stock failed to burst.
Investors watching the macroeconomic headwinds will notice that listed companies in China have performed poorly. KraneShares CSI China (KWEB) is down 19.6% year-to-date. Including today’s rally, FUTU stock lost 14.9%, beating the index. How will Futu fare in the coming weeks after the release of first quarter results?
Futu posted a solid first quarter
In the first quarter, Futo reported revenue down 25.6% year-on-year to $209.51 million. Its paying customer base grew 67.9% year-on-year to 1.33 million. It now has 2.91 million registered customers, up almost 49% from last year. Still, trading volume in the first quarter fell 41% year-on-year. Futu managed to increase the number of paying customers amid a weak stock market that hurt trading volume. The stock is approaching a bear market. Higher interest rates in all countries will weigh on the market. Fortunately, China is the only country to cut interest rates to offset the slowdown caused by the more than two-month lockdown in Shanghai.
Futu recorded a significant increase in the balance of securities lending and margin financing. To manage risk, clients reduced some of their margin positions to avoid further losses due to market turbulence. Strong interest in Chinese tech names, as well as leveraged and inverse exchange-traded funds, drove trading volumes higher.
Futu increased its market share in derivatives trading. Hong Kong futures and options volumes increased 6% and 12%, respectively. To optimize its operating margins, expect the company to benefit from new trading product offerings. For example, it launches VIX futures in Hong Kong and exchange-traded products in Australia. It will also offer two new algorithmic orders for accredited investors in Singapore.
Futu compensated for lower trading volume with blended commission rates that increased from 5.9 basis points to 7.3 basis points.
The company limits operating costs as much as possible. Sales and marketing expenses increased 5% year-on-year. But general and administrative expenses increased by 128% year-on-year. It has increased its workforce to support its international office openings.
The consolidation of smaller brokers in Hong Kong will increase Futu’s market share growth. In Singapore, more and more customers trust Futu by increasing their asset deposits. Investors should expect net asset inflows to continue as clients choose Futu’s platform.
If equity markets continue to weaken, the size of client assets could decrease. This is akin to ARK Invest (ARKK) benefiting from a net inflow of assets as the value of the shares held fall. As long as Futu attracts quality customers to Singapore in increasing numbers, its business growth will continue. Moreover, if stock prices stabilize, Futu will experience accelerated growth of quality customers.
Futu compensated for lower trading volumes by collecting more commission income from derivatives. In the first quarter, derivative accounts accounted for 30% of the trading commission. Investors needed financial instruments to hedge against volatility and downside risks. All the company had to do was steer its clients towards derivatives by providing investor education. Unlike Robinhood (HOOD), Futu values the importance of providing investment education to enable its clients to manage their risk-reward returns.
Futu experienced higher than expected customer acquisition costs. CFO Arthur Chen said he had a budget of HKD 2,500 to HKD 3,000 in CAC costs. Instead, CAC costs exceeded around 3,500 HKD. He spent more on ad campaigns that continued from last fourth quarter into the first quarter. Going forward, PCA levels are expected to fall within the budgeted range.
Industry consolidation suggests the stock market is contracting. However, Futu has marketing campaigns targeting existing customers. This should increase net asset inflows. Its competitors are also leaving the Hong Kong market, encouraging new customers to do business with Futu.
Futu Stock Quality Comparison
Futu has a poor quantitative rating with a “sell”. By comparison, SA’s rating system gives Schwab (SCHW) a “hold.”
FUTU stock only performs well on growth and is fair on profitability. It beat the Schwab stock on the value score:
Stock Rover Chart
The Moving Average Convergence Divergence, or MACD, crossed on May 2, 2022. The stock signaled a buy, ahead of the June 6 rally. The buying volume is a level not seen since March. Consider using the 50 and 200 day moving averages as a guide. The stock could trade between $40 and $55 from here.
Your takeaway meals
Admittedly, Futu rose after China lifted its investigation against DiDi and the US government lifted its tariff on green power. Investors should consider letting the market take profits on these macro events. They have very little to do with Futu’s rally after the earnings report.
Short sellers have a big bet against the stock. The post-earnings short compression is due to the 17.38% short float position. Again, consider letting the market take profits on Futu shares before re-establishing a position.