Investment Action: Sold all Avanza shares @ SEK 304 which is roughly a 3% position now
Despite a set of very strong Q1 2021 results, I am going to sell Avanza shares and very unfortunately no longer be part of Avanza’s growth journey from here. I sold a large chunk of the Avanza investment in Oct 2020 at around SEK 185 and clearly my ability to time the market is terrible because Avanza shares trade around SEK 300.
The main reason for selling is the same as before: Avanza’s earning is cyclically high due to higher than usual trading activity from its customers (mostly retail customers).
As seen in the chart below, Avanza customers increased their trading activity very significantly for the last 12 months. The average trade per customer per month is ~1.72 between 2009 to 2019 while the average trade per customer per month since 2020 is ~ 4. This is 130% above the 10-year average. And one can say with a high degree of confidence that the global retail trading boom has been driving the increase in trading activity.
In Q1 2021 earnings call, the CEO also explained that US tech stocks, such as Tesla, account for a disproportionately large amount of trading turnover.
Over time, I would expect the retailing trading boom to recede and Avanza’s trading activity per customer to converge a long historical average of around 1.5-2 trades per month.
Even if I assume that Avanza reaches 3m customers in 2025 (exceeding its own stated goal of 2m customers in 2025), its trading revenue in 2025 would be SEK 1.3bn which is only some 20% above the 2020 brokerage revenue of SEK 1.1bn.
Making some reasonable assumptions about fund commission and interest income, Avanza could make SEK 3.5bn revenue in 2025 and a net income of SEK 1.9bn. Assuming 25x multiple on 2025 earnings, which is quite aggressive in my view because Avanza probably finds it harder to grow a customer base of 3m in a country of 7m population, this implies a market value of SEK ~50bn in 2025. And this doesn’t get me very excited about prospective return given that Avanza’s market cap is SEK 48bn today.
That said, I could be wrong on Avanza on two accounts – 1) Avanza could develop new products to offer to its users and generate higher revenue per user such as lending products; 2) Avanza makes much better progress with its corporate pension business than I expect.
Selling a high-quality business on simply the basis of valuation is always very dangerous. But I think this is one of those extreme situations that it is possible to make a valuation judgment.
Operationally, Avanza should continue to do well and I hope to rejoin as a partner in the business if valuation becomes attractive again.