Move over Robinhood and WallStreetBets; a new social trading platform is coming to the United States with the backing of some the world’s leading financial institutions. It’s going to be huge, suggests Jon Markman, growth stock expert, tech sector specialist and editor of Strategic Advantage.
The eToro platform just recently made its pubic market debut via a special purpose acquisition company. The Israeli firm boasts almost 20 million registered users and $605 million in 2020 sales.
Investors should consider buying the corresponding SPAC, FinTech Acquisition Corp. V (FTCV), eToro was born in 2007 when Yoni Assia, Ronen Assia and David Ring released code for an OpenBook investing platform.
The breakthrough idea was members could view and automatically copy portfolios of other members. Several investment funding rounds later, in 2013 eToro announced no-commission trading and won the endorsement of regulators in the United Kingdom.
The platform moved to Germany in 2014. Three years later a module for cryptocurrency trading launched.
What separates eToro from so many fintech startups is the management team has been careful to get the blessing of regulators at every step. Many disruptive companies routinely push the envelope, choosing speed over prudence. “Go fast and break things” was a Facebook motto.
The conservatism attracted big money American investors, including Betsy Cohen, an electronic banking pioneer. Cohen founded Bancorp. in 2000, one of the first FDIC-insured virtual banks. She launched Financial Acquisition Corp. in 2015, a financier to help promising financial tech companies raise capital. The eToro incarnation is version 5 and values the company at $10 billion.
Cohen secured $650 million in capital from SoftBank Vision Fund 2, ION Investment Group, Third Point LLC, Fidelity Management & Research Company LLC and Wellington Management, among others.
Having backers with deep pockets is a good thing yet the real sizzle in eToro story is its copycat feature. Once members fund a brokerage account and set up to follow popular members, the duplicate transactions occur automatically, in real time. Members can even gear the portfolios to their account size with fractional shares.
It is a killer feature that comes from superior technology and scale. And unlike Robinhood, eToro does not make money by selling order flow data. This means professional high frequency traders are not front-running the orders of smaller eToro investors.
The company makes money by acting a lot like a traditional bank. It charges stated fees on currency conversion, withdrawals, and for inactivity. eToro also earns invisible fees based on the spreads between the bid and ask for traded securities. The combination of these businesses is surprisingly lucrative.
eToro generated $605 million in fees in 2020 on the strength of rampant growth in transaction volume. According to a recent press release, the company executed 75 million trades in January 2021 alone. And there is plenty of upside ahead.
Currently most eToro accountholders live in Europe. The latest investor presentation put the number at 69%, with 18% in Asia and only 8% in the Americas.
At its root eToro is a digital transformation story. Investors are moving away from traditional brokers toward digital platforms where they can do research, converse with other investors and place trades. This workflow is especially entrenched with millennials, the bulk of eToro’s 18.7 million member customer base.
Currently there are 72 million millennials in the United States, the largest demographic. Accenture analysts estimate millennials will inherit $30 trillion from their parents.
Managers are projecting $2.5 billion in sales by 2025, an average compound growth rate in excess of 35%. Gross profits are expected to reach $700 billion. eToro recently logged gross profits of $95 million.
The expected growth rate for eToro s comparable to Square (SQ), PayPal (PYPL) and Shopify (SHOP) yet shares were priced at 9.7x expected net revenue for fiscal 2022, versus 26.2x for its comparable firms. eToro still appears to be quite underpriced so keep an eye out if trading gets silly later in the spring.