eToro going public: Should you invest in eToro stock?
eToro stock: On the back of record stimulus checks and a lack of ways to spend money, retail trading activity soared in 2020 with many trading platforms seeing big sales growth.
Tel-Aviv-based eToro is one of the biggest beneficiaries. The global trading app took the opportunity to go public through SPAC (expected to close in the third quarter of 2021).
Catch me up: Founded in 2007, eToro was created as a foreign exchange trading platform — expanding into stock/cryptocurrency trading over the next 14 years.
- Today, eToro operates globally with 69% of its users in Europe, 18% in Asia, 8% in the Americas and 5% in the middle east.
- In March 2021, eToro announced a deal to go public through a special purpose acquisition company (SPAC) — valuing it at $10.4b
2020 was a massive year for stock trading platforms. Retail investment trading activity reached a record high and trading platforms saw a record number of new uses. For eToro…
- Sales spiked in 2020 — growing to $605m, up 147% from 2019.
- Growth continued into 2021 with 3.1m new users in the first quarter of 2021, up 214% compared to the first quarter of 2020.
How does eToro make money? The more its users’ trade, the more money eToro makes.
- Trading revenue (87% of sales in 2020) — whenever an equity, crypto or contract trade is made, eToro makes a margin between the buy and sell price
- Interest income (7%) — eToro earns interest on any margin positions that remain open overnight.
- Currency conversion and other income (6%).
eToro stock opportunity
Unlike a traditional trading app, eToro has built its app for the millennial/gen-z generation, which values a slick interface, commission-free trades and product features unavailable in traditional platforms.
One differentiating feature of its app is its social trading aspect — which encourages investors to interact with other investors via its Copy Trading feature or social news feed.
While these features may seem small inconsequential, they can create a social loop that facilitates organic referrals to its platform — lowering its customer acquisition cost. With the financial services industry having one of the highest customer acquisition costs, any advantage it can get is a bonus.
What’s the upside? eToro’s growth relies on international and product expansion, and continued growth in retail investing:
- International growth opportunity: eToro launched its crypto platform in the US in 2019 and expects to launch stock trading in the US by the end of 2021.
- Launch of eToro money app and debit card — eToro’s first expansion beyond its trading products.
As a positive signal, we’re also seeing well-known hedge funds purchase shares ahead of eToro going public:
- Throughout June-July, hedge fund, Luxor Capital Group, ramped up their position in FTCV (the SPAC taking eToro public).
- In March, famous fund manager, Daniel Loeb of Third Point Capital initiated a position in FTCV.
The SPAC merging with eToro is also sponsored by Betsy Cohen, a banking veteran and the previous CEO/Founder of Bancorp. When it comes to navigating the US markets, eToro is in good hands.
Why now? The deal to take eToro public is getting closer to completion and there’s a chance we may see its stock rise as we get closer to its de-SPAC day.
SPACs have performed poorly in recent months with the Defiance Next Gen SPAC Derived ETF, which tracks the performance of newly listed SPACs, down 27% from its peak in Feb. Today’s SPAC market is playing out in different ways:
- When new SPAC deals are announced, the SPAC’s stock prices have seen much less of a jump. In 2020, some SPACs would jump as much as 50% in the days following their announcement but in 2021, SPACs would be lucky to jump 5-10%.
- When the deal is closer to being completed and the SPAC trades under the new company’s ticker, SPACs start to see more investor interest and prices tend to rise.
With eToro expected to close their merger in the coming months, the SPAC could begin to see more investor interest.
What are the risks with eToro stock?
One of the biggest unknowns with eToro is how investor trading habits will change after the world returns to normal. In its investor presentation, eToro forecasted a modest sales growth in 2022 as 17% — down from an expected 68% this year. If eToro can get its US stock trading app going, we believe growth can surpass its estimates.
- Cryptocurrency trading slowing down — In early 2016, crypto trading made up 63% of the company’s sales. But in 2020, that dropped down to 16%. Compared to the last crypto bear market of 2017, eToro has much less exposure to crypto today.
- Stock trading activity slows down — eToro expects 2021 sales to grow 68% but sees growth slowing down to 17% by 2022.
- Competition in the US — If eToro wants to take market share in the US, it’s going to have to go up against big incumbents like eToro, Interactive Brokers, Charles Schwab as well as emerging companies like Public and M1 Finance.
Competition will also make it more expensive for eToro to acquire customers. Despite spending a significant portion of its 2020 sales on marketing (37.6%), eToro was still able to generate a positive EBITDA.
eToro stock vs. Robinhood stock
Competitor, Robinhood filed for its IPO in recent weeks and expects to hit the market in the coming months. Sorry Robinhood, but we’re taking our bet on eToro.
Robinhood makes the majority of its sales from a model called “Payment for Order Flow (PFOF)”— where it sells its users’ trades to market makers. In the past year, there’s been a lot of controversy surrounding the practice.
- The method could present a conflict of interest for the brokerage — which could charge customers more per trade when they’re supposed to get customers the best execution price.
- In many countries, PFOF is banned and if US regulators decide to ban the practice, Robinhood’s business — which makes 81% of its sales from PFOF — could be at risk.
Robinhood is also not allowed to operate in the EU, which has a strict stance around the PFOF model. This gives eToro a big advantage, which is allowed to go after Robinhood’s only market, the US. On the other hand, Robinhood can’t touch eToro’s European market.
Robinhood is also going through several lawsuits and is under intense scrutiny from US regulators. We prefer to go with a company that doesn’t have all this baggage.
Investors: Over the next couple of months, eToro is expected to complete its merger with FinTech Acquisition Corp. V (NASDAQ:FTCV). Before then, investors can get exposure to eToro by buying FTCV and upon merger completion, eToro will trade under a new ticker.