eToro - A high growth trading platform

Investment Analysis Clubs Saul’s Investing Discussions
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I’ve been taking a look at eToro over the past week. They’re going public via a SPAC merger with Fintech Acquisition Corp (ticker FTCV) with plans for the merger to complete in Q3 this year. This means we can buy the company now, prior to the merger (taking on the risk that the merger doesn’t complete).

For those unfamiliar, eToro is an online trading platform operating mostly in Europe (69% of revenue) with some business in the Asia Pacific (17%) and Americas (9%). Their revenue was highly dependent on crypto trading back in 2017 (63%), but has since diversified quite well: 44% Equities, 32% Commodities, 16% crypto in 2020. They have a unique business model where they allow members to “copy trade” other investors who have public portfolios (aka “Popular Investors”). This allows someone with little investing experience to benefit from the experience of other investors on the platform.

A quick rundown of some of the numbers:

FTVC Enterprise Value ~ 10.3B

eToro Revenue:
2017 - 263M (338% YOY)
2018 - 369M (40% YOY)
2019 - 244M (-34% YOY)
2020 - 605M (147% YOY)
Q1 2021 ALONE - 347M (141% YOY)

For 2020, the cost of revenue was 61M. If I’m reading this correctly, this gives them a gross margin of 89.9%.

Projections (provided prior to the Q1 update):
2021 - 1.018B (68% YOY)
2022 - 1.196B (17% YOY)
2023 - 1.552B (30% YOY)
2024 - 1.988B (28% YOY)
2025 - 2.548B (28% YOY)

But, given the massive Q1 beat and the fact that they have stated they are reinvesting the extra revenue into marketing, what if their revenue stays consistent with Q1? Even with no QoQ growth, their revenue would be 1.388B. With 141% growth (which they had in Q1) for the entire year, it would be 1.458B. These hypothetical numbers for 2021 leapfrog the 2022 estimates and come in closer to the 2023 revenues. They’d be about 1.5 years ahead! As per their investor presentation, their marketing spend pays off within two quarters, so the heavy marketing spend in 2021 could pay off huge in the long run. At the hypothetical 1.388B revenue, that’s a trailing EV/S of 7.4 and I assume the forward EV/S would be closer to 6 or even 5.

Some major things are happening with the business in the next couple of quarters. Firstly, the merger must go through. As the stock is at about $10.70 per share, we would risk losing $0.70 if the merger does not go through. Each share would still be worth $10.

eToro is planning to move into the United States in Q3 this year as well. Of course, they will face stiff competition, but they have a unique offering and may become a darling in the eyes of retail traders if Robinhood gets any more bad press.

This brings me to my last point. The Robinhood IPO. They’re looking for an EV/S of around 15+ using full year 2021 guidance (with approx 2B revenue). Their revenue relies heavily on Payment for Order Flow, which is viewed by many as being somewhat unethical. eToro generates their revenue through the “spread”, which is a more transparent commission for the trader.

My point is this: eToro is in the same market but not directly competing with Robinhood (yet) with similar scale, a more ethical revenue stream, AND a unique offering…so perhaps they should command a similar valuation to Robinhood? If they should, my expectations are that the stock should be trading at around $30 by year end, a 200% gain from the current price.

Has anybody else done any digging on this situation?

Link to Investor Presentation: https://marketing.etorostatic.com/cache1/pdf/eToro-Investor-…
Link to Q1 Update: https://1mr3lc1zt3xi1fzits1il485-wpengine.netdna-ssl.com/wp-…

-Cam

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They have a unique business model where they allow members to “copy trade” other investors who have public portfolios (aka “Popular Investors”). This allows someone with little investing experience to benefit from the experience of other investors on the platform.

I think it’s more than just a minor semantics point to say that this is a feature, not a business model. What prevents the “copy trade” feature from being adopted by any other competing platform?

a more ethical revenue stream

I think this just plays more strongly in Europe than it does in the US. Socially-responsible investing has been around for decades, but I’m not seeing the advantage being as strong in US investors’ mindspace. In my experience (which at about 20 years pales compared to many here), SRI is a last-tier differentiator, if at all–an “all else equal” factor, if you will. We’re after the money.

In a way, it feels like Robinhood, only TikTok-ified so investors can “follow” the most virtuous (or similar) popular investors. I don’t think that’s enough of an advantage to hit the targets described. I’m not going to lie, a triple in ~5 months would be nice, but it doesn’t feel Foolish or Saulish based on what I’m seeing so far.

-n8

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Thanks for your response n8!

Yeah that was a poor selection of words, my apologies. Copy trading is a “feature” on the platform. They’ve actually patented this as “social trading” which should make it a little more difficult for their competition to adopt the feature.

I certainly take your point about the socially responsible trading, as it hasn’t been something on my radar previously. This is more of a side note in my thesis, but I think it’s important to be aware that the SEC is currently reviewing Payment for Order Flow which sprinkles in a bit of uncertainty with Robinhood. Additionally, PFOF is currently not allowed in Europe so we don’t have to worry about Robinhood eating eToro’s lunch.

I think copy trading is an interesting feature which is not yet available in the US and, with it, eToro may be able to carve out a niche in the market. Drawing a comparison to TikTok due to the social aspect of the feature actually seems like a positive. I certainly would have copy traded when I first dipped my toe into the market. But even without expansion into the US, they’re already experiencing very high growth… much higher than they guided just a few months ago.

Perhaps this isn’t quite a “Saul” stock due to the volatility and non-subscription revenue, but I do think this is an interesting high growth opportunity which may be flying under the radar in it’s early stages as a public company.

Again, thanks for the response and additional perspective.

-Cam

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My first post here.

I initially tried the eToro platform a couple of years ago and whilst not a fan myself of the copy trade concept I can see why there is an appeal, especially for the younger generation that are happy to just follow their favorites in life rather than carving out their own path.

If we look at this board for example, we have groupies (like myself) that sweat on every post that Saul, Bear, Muji and others write, wondering what changes they are making to their portfolios during the month. If Saul for example was on eToro, fans could copy his trades immediately and Saul would also financially benefit from the platform. He could become a “SPAAS” (“Stock Picking As A Service” and generate his own recurring revenue income). I am very confident that this concept will be very popular in the US which is much more aggressive than Europe when it comes to trading. I am sure that many of the best traders would hate to be “copied” but I am equally sure there will be enough that enjoy the attention and notoriety.

eToro will need to build out its available tickers to succeed however as their available tickers is not very expansive (I’m confident they will fix this though). I have a small position in the SPAC and will be watching closely although it will remain a very small position due to the cyclical nature of the business.

DSG

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