UP Fintech: Look Beyond Single Points and Consider Positive Growth Momentum (NASDAQ:TIGR)

My Buy investment rating for UP Fintech Holding Limited (NASDAQ:TIGR) remains unchanged. Investors should ignore the headline earnings miss for TIGR, as it was attributed to a one-time provision that is unlikely to recur in the future. Instead, the market should reward UP Fintech for its positive growth momentum. TIGR achieved a significant acceleration in revenue growth in Q2 2024 and delivered a substantial top-line beat. The bullish momentum for TIGR is likely to be sustained going forward given its newly funded current accounts for Q2 and the company’s full-year guidance.

The current article looks at TIGR’s last quarter financial performance. UP Fintech results for Q1 2024 were in focus for the previous article on June 6, 2024.

The top line was boosted by higher commissions

UP Fintech revenue growth accelerated from +9.6% YoY in Q4 2023 and +19.0% YoY in Q1 2024 at +32.4% for the latest quarter as revealed in its filing announcement of results. According to data from S&P Capital IQ, TIGR’s actual Q2 2024 top line of $87.4 million came in 24.5% higher than the sell-side estimate of $70.2 million .

The company’s top line is derived from commissions, financing service fees, interest income and other income. This past quarter, fees were the biggest driver of revenue growth for UP Fintech.

TIGR’s fees grew +54.9% YoY to $34.1 million in Q2 2024, which was equivalent to 39.0% of the company’s total revenue for the last quarter. The robust growth in fee income was supported by an increase in both trading volume and the number of newly funded accounts. UP Fintech saw +62.5% YoY growth in trading volume to USD 105.9 billion in the second quarter of this year. The company’s number of newly funded accounts also grew by +68.2% year over year to 48,900 for the most recent quarter.

UP Fintech cited “a more active market environment” as the main reason for its strong performance in Q2 2024 in the company’s Q2 2024 earnings announcement. I believe there are two key factors that will allow TIGR to maintain its positive growth momentum revenues in the second half of the current year and beyond.

The first factor relates to the favorable growth prospects for newly funded accounts.

TIGR indicated in its Q2 2024 analyst briefing that “we are confident we will deliver our annual guidance of at least 150,000 newly funded accounts in 2024.” This implies that UP Fintech’s number of newly funded accounts could increase by +21.8% this year compared to 123,110 newly funded accounts it achieved last year.

Almost two-thirds of the 48,900 newly funded accounts for Q2 2024 came from Southeast Asian markets. UP Fintech said its operations in Singapore, a key Southeast Asian market, saw “notable improvement in both user activity and persistence” with “new products,” according to Q2 earnings comments quarter. At its recent quarterly earnings briefing, TIGR also revealed that “the number of newly funded users (for July and August) also continued the rapid growth we saw in the second quarter.”

As such, UP Fintech’s fee income is likely to grow strongly in the second half of 2024 as the company continues to grow the number of newly funded accounts at a rapid pace.

The second factor is the limited impact of interest rate movements.

A cut in interest rates will not have a substantial impact on TIGR’s future top line. UP Fintech pointed out on the second-quarter analyst call that it has the potential to “increase market activities leading to more active trading volume and fee income” so as to offset any weakness in interest income. Specifically, TIGR estimates that a 25 basis point Fed rate cut in September 2024 will only reduce the Q4 2024 top line by about -1%.

Final performance was affected by a non-recurring item

TIGR’s GAAP net profit fell -80.3% YoY to $2.6M in Q2 2024. The company’s Q2 2024 GAAP EPS of $0.016 was -77.1% lower than analysts’ consensus projection of $0.070 per share according to S&P Capital. IQ data.

In its Q2 results announcement, UP Fintech explained that it suffered from “a $13.2 million loss provision for Hong Kong Equity Pledge businesses have experienced extreme market conditions and a significant decline in prices, resulting in a loan balance provision.” At its Q2 2024 results briefing, TIGR indicated that the Hong Kong equity pledge business had been discontinued “since last year before this incident occurred. ” and clarified that “this particular transaction (which led to the provision) continued because it was still under contract”.

Therefore, the $13.2 million provision is a non-recurring item that would not affect TIGR’s future bottom line performance. Additionally, TIGR’s pre-tax earnings would have expanded +8.3% YoY in Q2 2024, excluding this one-time item.

Separately, UP Fintech’s future earnings are likely to be boosted by favorable operating leverage. For example, TIGR’s largest operating cost element, employee compensation and benefits expense, grew +19.8% year-over-year to $23.9 million for Q2 2024. This was much less than the expansion top +32.4% year-on-year that UP Fintech achieved in the most recent quarter. In the previous section, we have already drawn attention to TIGR’s healthy revenue growth prospects. It is very likely that the company’s net income will expand at a faster rate than its revenues in the future, taking into account the effects of operating leverage.

In short, I anticipate that UP Fintech’s net profit will recover in the coming quarters, with the absence of one-time provisions and the positive impact of operating leverage.

Stock valuations are attractive

The market currently values ​​UP Fintech at 12.6 times FY 2024 normalized P/E according to S&P Capital IQ data.

In comparison, Futu Holdings ( FUTU ) now trades at a FY 2024 consensus normalized P/E multiple of 13.6x, and TIGR’s average historical medium-term P/E multiple was even better at 24.6 times.

TIGR’s normalized earnings are also projected to expand at a CAGR of +16.8% for the 2023-2025 timeframe, based on consensus data taken from S&P Capital IQ. This implies that a higher mid-teens P/E ratio for UP Fintech aligned with its future earnings growth is warranted.

Key risks

Certain risk factors related to TIGR deserve attention.

The company’s future interest income and total earnings could disappoint investors if the Fed initiates larger-than-expected cuts.

Also, if financial markets perform poorly, UP Fintech’s fee income and overall top line growth could be weak.

Conclusion

UP Fintech’s Q2 2024 positive growth momentum and favorable financial outlook are not fully factored into stock valuations. I find TIGR’s low-teens P/E multiple attractive and my decision is to maintain my Buy rating on the stock.