We are in the early stages of the financial technology (fintech) revolution. Like any disruptive technology, it’s impossible to predict the full extent of its impact. 

However, we are already starting to see some of the effects of no commission trading and fractional share ownership which has led to an explosion in retail trading volumes and increased speculation in call options. Two of the companies at the forefront of this shift are Robinhood and Futu Holdings (FUTU).

Robinhood was the first brokerage to offer no commission trading, eventually forcing its competitors to reduce their commissions. It’s less than eight years old, yet it already has 13 million users on its platform and over $25 billion in assets under management. In August, Robinhood overtook Schwab (SCHW) to become the largest broker in terms of the number of trades on its platform.

Robinhood is currently a private company, so retail investors haven’t been able to participate in its growth, although there is chatter that the company may IPO in the next year. For investors, who want to invest in the next generation of disruptive brokers, one option is FUTU, which has become the “Robinhood of China.”

Futu Holdings

The Chinese Internet is segregated from the rest of the world. Thus, a new crop of Chinese tech companies has emerged to serve this market whether it’s Baidu (BIDU), known as the “Google (GOOG) of China” or Alibaba (BABA), the “Amazon (AMZN) of China”.

These stocks have posted spectacular returns over the past decade, like their US brethren. Thus, investors should pay attention to Futu Holdings, which is disrupting the brokerage industry like Robinhood.

FUTU started operating in 2014. It raised money from backers such as Tencent (TCEHY), Sequoia Capital, and Matrix Partners. It expanded to other markets and offered access to international exchanges for its customers. Currently, the company has over 10 million users with total assets under management of $10 billion. 

3 Reasons to be Bullish

Even though FUTU is already up 119% YTD now could ultimately prove to be a buying opportunity due to three factors – earnings growth, expanding total addressable market (TAM), and increased opportunities for monetization.

Earnings Growth

Unlike many early-stage, tech companies, FUTU is already profitable. Over the last 12 months, FUTU earned $105 million in earnings, and it expects earnings growth of 67% in 2021. 

This type of earnings growth has translated into analysts becoming increasingly optimistic about the stock’s prospects. Estimates have been lifted which makes sense given the explosive growth in retail trading, taking place around the globe. Over the last three months, 2021 earnings estimates have increased by 15% and 2022 estimates by 12%. Out of the 5 analysts who cover the stock, 4 have a Strong Buy or Buy rating.

Expanding Total Addressable Market (TAM)

FUTU shares many similarities with some of the biggest, tech winners over the past decade. One common characteristic is that many underestimated the TAM of these businesses. Investors may likely be making the same mistake with FUTU.

FUTU is expanding into markets all over Asia, and its product is especially popular among Generation Z and Millennials. Within the markets that it’s operating, FUTU is increasing penetration especially among the underbanked. As more people in these regions enter the middle class, FUTU’s potential customer base increases. 

Its growth potential is clear from its last earnings report in which users increased by 137% and total client assets increased by 178%. Overall, total trading volume increased by 371%. FUTU’s product has become viral just like Robinhood has in the US and seen an acceleration during the pandemic. As a result, FUTU hit its 2020 growth targets by Q3. 

Improving Monetization

China has 167 million retail traders. In 2020, an estimated 15 million new accounts were opened. Like Robinhood, FUTU differentiates itself with lower costs, gamification of trading which appeals to the younger generation, and a better user experience compared to old-school brokers.

These factors will drive users to the platform. The experience of fintech platforms like Alipay demonstrates that once users are on the platform, FUTU can increase monetization by selling higher-margin products and services such as wealth management services, insurance, and other financial products. 

Conclusion

FUTU is an impressive Chinese fintech company bringing trading and investing into the 21st century. The company should continue to see significant growth, as the legacy brokers are ripe for disruption and a new generation of investors is eager to get involved in markets. 

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FUTU shares were trading at $99.41 per share on Friday afternoon, up $0.41 (+0.41%). Year-to-date, FUTU has gained 117.29%, versus a -1.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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