Freetrade Valuation Model

[Cameron]

The below OP relates to the 2021 model. I have refreshed this for 2023, details in this comment:

Freetrade Valuation Model

I made some basic updates to this model for 2023 in case anyone is interested. I’ll likely update it when we get more details on Tuesday. [image] [image] Assumptions: Refreshed discount rates to reflect the new macro environment, brought target maturity date closer as FT shifts priorities. Reduced probability of a successful IPO/exit to 75% Forward Model: Updated to reflect new pricing plans increasing revenue rates, reduced AUA estimates, especially in the bull case to reflect pared back …

2021 Model

Apologies for the new thread, but I thought this might derail a lot of the other share price guessing / crowdfunding discussion threads.

This evening I tidied up my FT valuation model (which I had previously shared part of) and thought it may be of interest to others. My reason for making this is to add some disciple to my investing decision for the next round and try and have more of a long term outlook. It’s way too soon to consider a DCF model which would be my normal approach, so I thought I’d try something new and make a relative value model.

Freetrade Relative Valuation (shared)

How to use this

Firstly I’m sure this has some bugs, don’t make any investment decisions based on anything you see in this model/thread and especially not on my inputs - my estimates are guesses and some of my peer data is likely out of date/wrong.

This is about modelling the present value for Freetrade in an estimated future state once it becomes a mature business. I doubt it will do much to predict the next crowdfunding price, but once that price is given it might help you think about what that price implies for FT’s future.

This is probably going to be most interesting once we have a new crowdfunding share price, hopefully that’s not too far away.

In general yellow cells are supposed to be updated.

1. Input assumptions

Add general information / assumptions into the Inputs sheet. Most importantly the current Freetrade share price (once the next fund round starts)

2. Input/Review peers

Add/Update peer information in the Peer sheet.

3. Forward modelling

Modelling is done in two stages, modelling assets (growth) and revenues (business)

To model assets:

Create Bear, Base and Bull stories for growth and input expected User and Assets/User figures. Mine below.

• Bear - Freetrade continues strong but slowing UK growth and becomes very popular in the core demographic (~£5bn AUA, like current size of Nutmeg, Trade Republic, Scalable Capital)
• Base - Freetrade continues with exceptional UK growth and becomes broadly popular along with limited growth in other minor markets (~£20bn AUA like a smaller Degiro)
• Bull - Freetrades continues with exceptional UK growth competing for the top spot in the UK and becomes a significant player in other major markets (£75bn+ AUA like AJ Bell, HL, Robinhood)

To model business:

Create Bear, Base and Bull stories for revenues / business. I’ve included the tools to estimate this from the bottom up by tweaking things like asset turnover (how much people are trading) and average account sizes. Mine below.

• Bear - Freetrade is primarily a low cost long term investment platform (~25bps like AJ Bell, Interactive Investor, Charles Schwab)
• Base - Freetrade is primarily a low cost trading platform (~50-60bps like HL, Trade Republic, Robinhood equities)
• Bull - Freetrade is a trading platform with differentiated products / premium offerings able to charge above-market pricing (100+bps like Robinhood inc crypto, Degiro, TradeStation)

The base case should be your most likely outcome and forms the default position for all other analysis.

Using these inputs review the implied fair value. If yours are anything like mine these are going to be massively varied to reflect the very uncertain future of such a young company - which is where the next section should help.

4. Sensitivity Analysis

Review the impact of assumptions and refine the model by using sensitivity analysis sheet. This shows how the implied share price changes with different assumptions.

The first table lets you look at the intersection of peers/modelled scenarios in terms of Assets and Revenues. This lets you answer questions like “how might I value FT if it reached the assets of HL with the revenue rate (revenue/assets) of RH?”. You can change the peers using the dropdowns.

The second is similar but uses the base case revenues and instead looks at Users & Mean Assets. This lets you answer questions like “how might I value FT if it got as many users as HL with the mean assets of RH?”.

The third table lets you pick 2 different inputs and shows the range of values between your Bear (0%) case estimate and Bull (100%) case estimate and the implied impact on share price. This lets you see which estimates are most critical to your valuation and helps you refine your base case estimates.

5. Reverse Model

Review what the current share price implies for future growth, using your base case estimates for revenue from the forward model.

Feedback

Feel free to copy it and play around. If you do please let me know your thoughts/feedback here. I’m curious about what estimates / assumptions others might make and what people think of mine.

[cromptonenator]

Well done you for putting this together! Just wondered if you’d include Trading 212 in the peers section?

[Wulfy]

This is brilliant work Cameron.

I’d suggest adding t212 too and perhaps bux as another European counterpart.

[NeilB]

Brilliant work @Cameron i’ll dig out the MacBook later and have a really good play. An iPhone screen doesn’t quite do your post of model justice.

[Cameron]

Thanks, glad you like it

@Wulfy @cromptonenator - I’d love to add more peers, but I really need decent numbers for Valuation, Revenue and Assets (and ideally users + earnings) for them to contribute to the metrics and when I looked I couldn’t see that information for T212 / Bux. If you do see that anywhere let me know and I’ll be sure to include them.

[grievyz]

This is sick!

I always sorta did back of the hand calculations with their revenue margins but what you have there is really technical and clean, and gives a flavour of the revenue earning potential of the platform.

Thanks very much, will have a look in detail later and see if there’s any suggestions I may add.

[Barka181 (Ronnie B)]

This is incredible work!

[Wulfy]

I’ll try to take a look too when I get chance. I think i saw some figures in the articles for both of those when they raised funds last but will need to see how comprehensive it all was at the time.

[David76 (Davide)]

Hi, you should add Fineco.

Thanks

[winnie]

This is epic work! Thanks for sharing Cameron

[AlanJones]

@Cameron An excellent breakdown of the FT valuation, really really impressed by the level of detail. Thanks very much for all the effort and time this has taken you.

I’m looking forward to the FT Bull case coming true!

Qu: Does this model assume only UK growth or is it based on International growth also?

[nazh]

very impressed with this Cameron.

[marcofasi (Marco)]

Well done! Did you assume £10.90 as current share price?

[Cameron]

@David76

you should add Fineco.

It’s a bit tricky because lots of their business is very different, so I’d probably have to strip out the relevant brokerage parts from their earnings reports - looks like they are quite transparent so that should be doable, I’ll take a look later.

@AlanJones

Does this model assume only UK growth or is it based on International growth also?

It’s fairly UK-centric in the revenue model, but should be fine for assuming international growth as long as you are willing to assume that other markets will be comparable (say you estimate 60bps revenue from the bottom-up in the UK and just assume that will persist across other markets).

[Cameron]

Yeah, that’s just a random guess from me until we hear about the next funding round.

[Cameron]

I’ve done my best to add Fineco (brokerage) - I stripped out the 1H21A Brokerage Revenues (230.2m) and assets 21.76bn from their 2Q21 earnings, I estimated the users at ~109k based on their quoted figure of 200k+ assets per user.

I kept the P/S at the same of the total company at 13.06 to give a value for the brokerage business of 3bn, which is probably on the high end.

[David76 (Davide)]

thanks Cameron, great job!

[acfisken (Alexander Fisken)]

Great stuff, thanks for sharing.

[fanfanito (Francois)]

Well done Cameron

Hopefully FT will cover cryptos soon, that would be a game changer in terms of product and business trajectory considering the valuations of cryptos exchanges. Crypto and tokenisation is the future. FTX success and others are amazing

[hmlr (Henry)]

Hey Cameron,

Great work on this. Have only briefly looked over it but it looks like there’s no inclusion of dilution (set at 0)

I assume it’s highly unlikely FT will reach 20m user scale without dilution, probably considerable too… Wondered if you’d modelled anything with that factored in?