It’s been a difficult 12 months for Hargreaves Lansdown (LSE: HL.) investors with the share price declining 20%.
However, stretched out over three years, the stock is down a whopping 70%. Excluding dividends, if I had have invested £5,000 back then, it would now only be worth £1,500!
What’s gone wrong?
The UK’s largest direct-to-consumer platform woes can be traced back to 2019. It was accused of having too close a relationship with disgraced fund manager Neil Woodford. Investors in that failed fund believed it didn’t perform due diligence before placing it on its star buy list.
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However, that was only the beginning of its problems. During the pandemic crash, its clients withdrew record sums from its funds. Ongoing fund fees collapsed.
Off the back of a huge injection of liquidity by central banks, its share price bounced back strongly. However, this proved to be short-lived. With the proliferation of zero-commission trading, its continued downward trend has led many to question the ongoing viability of its business model.
Cash is king
In its half-year results back in February, it reported a surge in revenues, hitting a record £350m. However, this was driven not through traditional investment fee growth but as a result of a 10-fold increase in net interest income.
Increasing levels of volatility across stock markets in 2022 meant that a significant number of its clients decided to hold cash within their SIPP and ISA trading accounts. Indeed, cash accounted for 11% of total assets under administration.
In addition, cash held in its active savings jumped 37% to reach a record £6.3bn. The revenue margin on cash deposits is around 170bps. Compare that to 30bps for share dealing and 39bps for funds, then it provides some kind of context for the huge jump in revenues.
A viable business?
When Hargreaves Lansdown was formed back in 1981, it was one of a kind. Today however, competition is intense. Indeed, the Covid pandemic led to the growth in commission-free trading from the likes of Robinhood and Trading212.
This one-time fad now seems to be growing in prominence. Recently, Charles Schwab introduced zero commission on all US equities. Hargreaves currently charges £11.95 for every purchase and sale of UK and US equities.
As long as its more traditional competition, like AJ Bell and Interactive Investor, continue to have similar charging structures for share dealing, then I doubt whether commission-free trading will be the norm anytime soon.
Of course, there is the argument that even if share dealings were free, it would not hurt its bottom line significantly. After all, 84% of its existing revenues comes not from such transactions, but ongoing fees for holding funds, shares and cash.
Hargreaves does have a lot of positives. Its revenue base is highly diversified. It’s by far the biggest private investor platform. Indeed, I hold an account. But I think its days of heady growth are behind it.
Given the level of competition, together with continued uncertainty in stock markets, I’m of the opinion that a multiple of 16 times earnings provide little scope for growth. So I won’t be investing.
