SelfWealth is by far the biggest position in my personal portfolio. It was also the first trade I put on Strawman where I allocated the maximum. I decided to trim it back on here because I have been tweeting to death about it non-stop for months and people are probably sick of hearing about it. That being said, here is why SWF is still my best and highest conviction idea.
SWF experienced a sudden spike in growth in Jan/Feb which had been made public via The ASX, They raised money at 0.14 and were trading at 0.16. Then when Covid panic hit, the shares were sold off hard along with everything else. But they shouldn’t have been. Over 50% of SWF gross revenue comes from trade volumes. The ASX volume had exploded as people panic sold all their positions in March. Those that sold their positions also left a large portion of the funds from those sales sitting in their Selfwealth cash accounts. The net interest margin on those cash accounts is the other main component of SWF revenue.
It was the perfect storm, a spike in growth combined with a huge surge in trade volumes and cash accounts. I was buying heavily at 0.10 and accumulated a position far beyond my rule/guideline for maximum position size, as was my conviction.
With SWF now trading closer to 30c it is a different proposition, but not necessarily a less attractive one. SWF now finds itself much less under the radar than a few months ago (For example it is now in the top 20 on Strawman) it has attracted recent buying from Funds and liquidity is picking up.
At this point in time in would be naïve and arrogant of me to assume that I know more that all the current buyers and sellers combined and that I can do a better job determining what the price should be. In fact, I think it is mistake to try and precisely value any company experiencing this sort of rapid growth. With improved liquidity and interest the market price should be given much more weight now and treated as a more reliable benchmark.
At this juncture I am instead using a different method to determine whether I think it is good value here. It is a method that I used very successfully when sports betting into liquid markets. That is, take the current market price as your most accurate base assumption, then handicap that price based on specific pockets of information that you believe the market is misunderstanding.
There is currently a narrative among many, that the last quarter was just a Covid related spike and that things are now normalising. It is true that ASX volumes have returned to more normal levels, but what hasn’t slowed down is SelfWealth new clients signing up. Trade volumes are in a large part a derivative of the total client numbers.
I am currently tracking many metrics and data points that suggest growth in new traders this quarter will be huge. I assume the funds trying to get set around this 30c level are not silly and will also be expecting solid growth, but I think they are underestimating just how much. I think the next 4c will blow the expectations away of those currently paying 30c and that those same people will be happy to pay much higher prices.
The Longer-Term Outlook:
There are a couple of interesting self-fulfilling prophecies playing out positively for SWF at the moment.
1. SWF is in a unique position where it almost doesnt matter what the market does from here. If we contiue this melt up in markets Then the SWF share price will continue to get dragged higher like every other stock. If we experience another wave of covid or a different shock that causes a spike in volatility like in March, then trade volumes would increase again and Selfwealth would begin making even more money.
2. I recently took a look at the broke data for SWF and found the number one buyer was Open markets (who execute Selfwealth orders). In other words, Selfwealth customers are buying SWF shares. Your first thought may be “great” retail buying is a negative sign. On the contrary. We already know that funds are trying to get set. They are beginning to pop up on the register and if you follow the orderbook flow you would notice some of the ~300k line wipes in recent times, which is a sure foot print of big buyers.
But Selfwealth customers buying the stock is a phenomenon that adds fuel to this fire. You have a company that is currently growing new users at an insane rate of 50%+ every 3 months. Not only are these new users blowing up the company's revenues, but with every new customer you now have a potentially new and likely buyer of the stock.
3. Momentum and trend traders are a very different breed to your typical investor. They are not interested in the fundamentals of the company rather just the direction of the share price and that the volume backs it up. But SWF has had a big run, wouldn’t momentum traders be in there already? Sure, some would be, but the SWF run up happened quickly in just a few months, so it would not be on everyone’s radar yet. Also, the company market cap and liquidity were low which would have discouraged many.
The main point to make however is that unlike many investors, momentum traders do not suffer from an anchoring bias. They don’t care that the price is higher than where they could have once bought it, in fact they relish that as a good sign and a buy signal.
Funds, retail buyers and SelfWealth customers will continue to buy, putting a floor under the price, while momentum traders will continue to flock to the stock as it pushes higher.
4. A common theme that seems to be of concern to many is that a big player with deep pockets will come in and start a price war with SelfWealth. Perhaps someone that can afford to run a trading platform at a loss in order to leverage other more profitable financial products to clients. In my experience these types of companies don’t really want to get their hands dirty. They are unlikely to go to all the effort to try and wrestle market share from Selfwealth. This could take years and a much more attractive option would be to just make a take-over bid and begin leveraging their other products immediately.
In other words Selfwealth is on route to becoming a very tasty takeover proposition.
With negative real interest rates (interest rate - inflation), investors are switching to riskier assets like never before. Selfwealth appears to be possibly the most direct beneficiary of this once in a generation phenomina.
I say it is once in a generation because, investors have never experienced a time in their lives where real interest rates are negative, and are searching for reasonable returns in riskier assets.
Here are the takeaways. I think you will agree these numbers are rare to see indeed:
1) Revenue up 101% over three months.
2) Active traders up 44% over three months.
3) Cashflow inflection point, with cashflow now running at +20% of receipts. Its maiden positive cashflow result.
We are heading into unprecedented and volitile times. Investing will be more challenging than ever, however, it is clear Selfwealth is one of the greatest ASX beneficiaries of the times.
1) Selfwealth are winning 25% of new or switching active traders (15000+ accounts per annum), with their estimated market share increasing to 4%. However, SWF reported 1741 new accounts in January, which equates to a run rate of 20000+ new customers per annum.
2) Strong trends of January are continuing into February.
But, SWF have just $1.5 Million in the bank, and are burning cash at a rate of ~$500k per quarter (although ETF costs were paid upfront last quarter). But, I expect cash burn to fall to $330k this quarter, With breakeven by the end of the calendar year possible.
With the market downturn, it is possible there will be a jump in trades and cash, which is great for SWF. They could surprise on the upside this quarter.
Datt Capital became as significant shareholder late last month, and have provided their theis in theis blog:https://www.datt.com.au/blog/a-high-growth-opportunity-in-volatile-times
Their forecasts are very optimistic, I don't Can't come up with earnings anywwhere near their estimate.
But if they want to pump the stock, it is OK by me........
DISC: I hold
So after a short period where volume dropped off and we were treading water, Volume was back today and the Share price took off +16.5%.
Observing the order flow today and this was real buying, Offers were being chewed up all day at 38c and then closed on the high of the day at 39c. This was the footprint of a fund buying or at worst a very serious individual.
This is looking great here and thats with a bumper report still to come!
From the last update the increase in customers loading onto Selfweaths platform is a sign that the structural shift onto the online low cost broking environment is continuing strongly. This will drive up revenue for SWF and given it has now achieved some sort of scale as indicated by being cash flow positive from its last update it is well positioned to have any revenue made from further customers fall to the bottom line. Albeit they did say they were going to spend a little to better their platform, but I think this willl be more than compensated as the land grab of customers continues.
There was talk of competition from overseas players with the mention of ‘Zero-brokerage’ players, but from extensive research it is believed that the Australian market environment would not support these models, so the risk from these are minimal for now.
The growth opportunity for SWF in the current environment is favourable and should continue to grow.
Q4 Results: http://investors.selfwealth.com.au/DownloadFile.axd?file=/Report/ComNews/20200706/02251723.pdf
There was discussion around SelfWealth hitting $1m Positive Cash Flow however I thought this was quite eye watering to begin with, however I think $800k is the next best thing. It will be interesting to see how Management use their Capital to reinvest and grow SelfWealth as they are branching into US Equities in later CY20.
An update on Self Wealth's site engagement*, as mentioned in my valuaton they were the #87,000 most popular enagaged site in Feburary and they are now are at #34,500~ at mid June.
My opinon on this statistic is greater use of its platform, greater exposure to new and prospective traders which translates into a higher number of accounts and extrapolating from this, higher revenue and interest on account funds.
*Please note that the way Alexa gets to this number is not fully available to the public an is a blend of time spent on site as well as how much unique new traffic is visiting the site. They are quite reliable in their metrics (in my use with them in the past however please take every statistic that you cannot view the data for with a pinch of salt.
Selfwealth report remarkable numbers for Q3.
Targeting the launch of the international trading platform late 2020.
All signs pint to selfwealth having crossed the chasm, and is beignning to scale.
Some of it was to be expected, but it was still generally faster than I expected.
January vs Q2
Trades: +24.4% vs Monthly Average of Q2 (in line with expectations. Last year's Q3 was +29.6%, but +24.4% off a larger base is good)
Active Clients: +8% vs end of Q2 (+3735 and +4125 for the past 2 quarters. 3 months like Jan would be +5223 in Q3. It's +0.4% market share in 1 month. I'm thinking advertising was low too. Possibly some people started the application process before Christmas, and only just finished it in January, but hopefully the Jan numbers will repeat)
Client Cash: +19.9% vs end of Q2 (somewhat expected, since people withdrew money before the Christmas holidays, but this was still fast, almost reaching my full quarter target) Interest income should have no costs involved, so +19.9% is nice and should flow straight to cashflow, and luckily RBA kept rates on hold this week.
Revenue: +21% vs Monthly Average of Q2 (up at the mid-point of +24.4% trades and +19.9% client cash)
Cash per active trader: Increased to $6950 from $6250-6550 for the past 5 quarters. I can't explain that. That would be a good trend if it keeps up. Possibly advisers bringing on higher net worth clients.
Trader per trader per month: Back up to 1.4, from 1.22 at Christmas. Past 4 quarters was 1.22-1.45 (1.45 after EOFY sale free trades given out). 1.4 is strong - not sure why it's above trend - maybe market volatility as somebody mentioned.
Average revenue per user: up from Christmas, but below trend, but to be expected after the October RBA cut. Being up after Christmas would be due to the trades per trader per month metric rising.
Revenue per trade: down from $15.01 at Christmas to $14.59 (total of all revenue, divided by total trades). Possibly suggesting a higher rate of free trades, meaning lots of people using the referral program and free trades in January.
Market share: From ~4.8% after December to ~5.2% at end of January.
ETF: still weak.
Adviser: no stats provided.
So growth confirmed for January with some metrics above target and some in line with target. Good result.
30 April 20: Datt Capital became a substantial holder holding 6.37% [12.37m] at around $0.21. They put out a research note outlining their thesis. This is a positive recognition of the company.
Revenue relatively flat Q on Q, in seasonally quiet quarter.
Key growth metrics:
1) Active traders grew 28% Q on Q. this is well ahead of trading revenue, which augurs well for Q3.
2) Cash held in trust grew 15% Q on Q. It is only earning 1.25% interest, but it is most likely bottomed out at this rate. A 0.25% rate increase will improve their revenue by about 7%.
3) Shares held grew 25 % Q on Q.
4) The gross margin per active user per annum I estiamte to be $60 for trading margin, and $32 for interest income - A total of $92 per customer per annum.
Key cost metrics:
1) Advertising grew 90% Q on Q.
2) Acquisition cost per customer is $98 per customer. CAC payback is around 13 months, which is excellent.
3) Costs skyrocketed with teh launch of the ETF. Cost of sales increased by about $300k, and given trading revnue was relatively flat, this must be the annual cost & launch costs of the ETF.
The challenge with SWF is that its gross margins are around 40%. It really needs to scale fast to reach break even from here. Q2 2021 B/E looks possible, but it's the cash position will be precarious. Q3 is critical.
6 Mar 20: 2,581 new active traders.
11% growth in overall active traders and 51.3% growth in monthly acquisition rate.
Cash balances of 26,000+ active traders grew to $217.22m at the end of Feb, up 33.3% MOM.
Feb finished with 42,396 trades up 28.7% on record breaking January.
To do an update in the same format as my January update:
February vs January
Trades: +28.7%, compared to ASX's trades being up 19.2% in the same period. So 2/3 of it was seasonal (Corona) and 1/3 was due to growing market share.
Active Clients: +11%. That's +2581, versus +1741 in January, which I believe was the previous record month. In January, they said they're getting 25% of new and switching traders (which suggests a trend towards 25% market share from the current 4%), but the February number suggests >25% of new and switching traders.
Client Cash: +33.3%. Very exceptional, due to the Corona crash. Enough to more than offset the RBA cut. But it's probably temporary, with people either depositing cash to buy shares, or selling shares due to fear.
Revenue: January gave a revenue number, but February didn't.
Cash per active trader: Increased to $8340 from $6950 in January and from $6250-6550 for the past 5 quarters. Seems like a temporary spike due to Corona.
Trader per trader per month: Up to 1.63 from 1.22-1.45 usually.
Average revenue per user: can't calculate it without the revenue number.
Revenue per trade: can't calculate it without the revenue number.
Market share: January update announced ~4%, while clients were up 11% this month, so maybe 4.5% now. (My prior update overestimated it to be 5%)
ETF: got even weaker because of the market being down. People are questioning whether it'll be closed. I can't imagine managament doing that so fast, but I see the logic, when it's got quite a long path to break even, and the company might be break even already without it.
Adviser: no stats provided.
Overall, February far above target on practically every metric, but with maybe 2/3 of the rise being temporary in nature due to Corona.
17 Mar 20: Lally +71,428 @ $0.14 [729,596] +$10,000