Capital Markets company Futu is standing out today, surging to $95.23 and marking a 3.0% change. In comparison the S&P 500 moved only -0.0%. FUTU is -21.01% below its average analyst target price of $120.55, which implies there is more upside for the stock. Over the last year, Futu shares have outperformed the S&P 500 by 63.6%, with a price change of 88.7%.
Futu Holdings Limited provides digitalized securities brokerage and wealth management product distribution service in Hong Kong and internationally. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Futu's trailing 12 month P/E ratio is 23.3, based on its trailing EPS of $4.08. The company has a forward P/E ratio of 2.0 according to its forward EPS of $5.45 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the finance sector has an average P/E ratio of 20.04, and the average for the S&P 500 is 29.3.
To better understand the strength of Futu's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,281,340 | 443,573 | 50 | 13.64 |
| 2022 | 975,969 | 390,820 | 44 | -2.22 |
| 2021 | 912,267 | 349,562 | 45 | 2.27 |
| 2020 | 427,015 | 147,936 | 44 | 158.82 |
| 2019 | 136,282 | 75,988 | 17 |
- Average operating margins: 40.0 %
- Average operating margins growth rate: 13.2 %
- Coefficient of variability (lower numbers indicate less volatility): 193.54 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Futu's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -811,352 | 9,956 | -821,308 | -289.32 |
| 2022 | 445,417 | 11,603 | 433,814 | -43.05 |
| 2021 | 770,803 | 9,033 | 761,770 | -71.06 |
| 2020 | 2,638,392 | 5,759 | 2,632,633 | 1007.82 |
| 2019 | 252,834 | 15,193 | 237,641 |
- Average free cash flow: $648.91 Million
- Average free cash flown growth rate: -28.1 %
- Coefficient of variability (the lower the better): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for FUTU, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
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 0.53 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 Finance sector was 1.86 as of the third quarter of 2024.
Futu is by most measures overvalued because it has an average P/E ratio, an exceptionally low P/B ratio., and positive cash flows with a downwards trend. The stock has strong growth indicators because it has a a PEG ratio of less than 1 and strong operating margins with a positive growth rate. We hope you enjoyed this overview of FUTU's fundamentals.
