Futu Tumbles -9.4% Today — Is the Market Ignoring Its Value?

Standing out among the Street's worst performers today is Futu, a capital markets company whose shares slumped -9.4% to a price of $58.01, 9.89% below its average analyst target price of $64.38. The average analyst rating for the stock is buy. FUTU underperformed the S&P 500 index by -8.6% during today's afternoon session, but outpaced it by 88.3% over the last year with a return of 68.2%.

Futu Holdings Limited operates an online brokerage and wealth management platform in Hong Kong and internationally. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

Futu's trailing 12 month P/E ratio is 26.4, based on its trailing Eps of $2.2. The company has a forward P/E ratio of 17.7 according to its forward Eps of $3.28 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 13.34, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand FUTU’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Futu’s PEG is 121.55, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Futu was $5,941,515,000 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, FUTU is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 291.1% and has on average been $8,164,013,000.00.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Futu's P/B ratio of 0.4 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Financial Services sector was 1.95 as of the third quarter of 2022.

Since it has an inflated P/E ratio, an exceptionally low P/B ratio, and an irregular stream of positive cash flows with an upwards trend, Futu is likely undervalued at today's prices. The company has strong growth indicators because of an inflated PEG ratio and strong net margins with a positive growth rate. We hope you enjoyed this overview of FUTU's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.