FRGE - Forge Global: No Catalysts In Sight

2023-11-14 09:04:24 ET

Summary

• Forge Global's revenue growth is projected to moderate in the fourth quarter of this year, as the fundraising environment for private businesses is still weak.
• Acquisitions and the expansion of the data business have the potential to drive top-line growth acceleration for FRGE in the intermediate term, but these aren't near-term catalysts.
• I retain my Hold investment rating for FRGE, as there is an absence of short-term catalysts for the stock.

Elevator Pitch

Forge Global Holdings, Inc. (FRGE) shares are still awarded a Hold investment rating.

My earlier write-up for Forge Global published on August 9, 2023, touched on the company's Q2 financial performance. In the current article, I fail to identify any meaningful near-term catalysts for FRGE, after previewing Forge Global's fourth-quarter results and assessing the company's key growth drivers in the form of acquisitions and the data business. Therefore, I see no reason to change my existing Hold rating for Forge Global.

Mixed Outlook For Q4 2023

The Q4 2023 outlook for FRGE is mixed, taking into account expectations of a moderation in top-line expansion and narrower losses for the last quarter of this year.

As per Wall Street's consensus estimates sourced from S&P Capital IQ , Forge Global's revenue growth is projected to slow down from +16.7% for the third quarter of 2023 to +14.4% in the fourth quarter of the current year. It is worth paying attention to the fact that four of the six analysts covering FRGE's stock revised their Q4 2023 top-line forecasts for the company downward in the last three months.

Seeking Alpha recently published the Q3 2023 earnings call transcript for FRGE on November 12, 2023, and a key metric disclosed at the third quarter results briefing helps to explain why the market is forecasting revenue growth deceleration for FRGE in Q4. Specifically, Forge Global highlighted at the recent quarterly earnings briefing that "over 80% of the companies we track have not raised a new (funding) round in 2023" based on its research.

FRGE's placement fees declined by -11.5% YoY to $7.3 million in the third quarter of 2023. In contrast, the company's custodial administration fees rose by +47.0% YoY to $11.3 million for Q3 2023 as indicated in the company's results press release . It will be tough for Forge Global to achieve a meaningful increase in placement fees for the near term until fundraising activity normalizes. Also, FRGE's substantial increase in custodial administration fees for the recent quarter was boosted by higher cash administration fees pegged to interest rates, which might not be sustainable.

On the other hand, Forge Global's losses are forecasted to be less substantial in the fourth quarter of 2023. In specific terms, the sell-side analysts estimate that FRGE's EBITDA loss will be -$9.3 million for Q4 2023 as per S&P Capital IQ data, which will be better than the company's Q3 EBITDA loss of -$10.4 million. The current consensus financial projections for Forge Global also point to the company's operating loss going from -$21.5 million in the third quarter to -$20.1 million for the fourth quarter.

On its third-quarter earnings call, FRGE made specific reference to the company's "disciplined and deliberate cost management strategy." As an illustration of its emphasis on expense control, Forge Global's number of employees decreased by -4% QoQ to 344 as of September 30, 2023.

M&A And Data Business Might Be Medium-Term Growth Drivers

Looking beyond the weak fund-raising environment which has hurt FRGE's top line and placement fee revenues, there are intermediate-term growth drivers for Forge Global. I see the upside potential associated with Forge Global's future inorganic growth transactions and the company's data business, but these growth drivers will likely take more time to play out.

There is no lack of potential acquisition targets for Forge Global. FRGE disclosed at its Q3 2023 results briefing that there have been multiple calls from bankers to alert the company to businesses or assets that are potentially up for sale. But Forge Global stressed at the third quarter earnings briefing that it is "going to stay focused on incremental (business performance) improvement" and "core strategic priorities" like growth plans for the data business. In other words, there is a low probability of Forge Global considering inorganic growth opportunities in the short term, although accretive M&A deals for FRGE shouldn't be ruled out in the future.

Separately, I noted in my March 6, 2023, initiation article that FRGE's "data business has decent growth potential for the long run" based on the fact that "established financial exchanges can generate as much as a third of their respective revenue from data subscription fees."

However, it is reasonable to assume that Forge Global's current data revenue isn't that significant yet. FRGE acknowledged at its most recent quarterly earnings call that the company is "still not at the point to break out our data business" metrics separately.

Misalignment Between Consensus Target Price And Analyst Ratings

The consensus price target and the investment ratings for Forge Global are misaligned.

The mean and median target prices for FRGE are $4.00 and $3.25 which translate to potential upside of +78% and +44%, respectively for the stock as per S&P Capital IQ data. As a reference, Forge Global's current consensus forward next twelve months' Enterprise Value-to-Sales or EV/S multiple of 2.66 times is much lower than the 3-6 times EV/S trading range (Source: S&P Capital IQ ) that the stock traded at in September-October 2022 when consensus estimates were first made available.

In comparison, four of the six sell-side analysts with FRGE in their coverage universe assign a Hold rating to Forge Global, with the remaining two analysts viewing the company's shares as a Buy or Strong Buy.

This is a classic situation where a stock's valuations are inexpensive, but there are no catalysts in the near term to re-rate its shares.

Final Thoughts

I don't see any short-term catalysts that might help to bring about a positive re-rating of Forge Global's valuations any time soon. FRGE's top-line expansion is expected to slow in Q4 2023, while the data business and potential M&A are growth drivers for the company in the mid-term. As such, I leave my Hold rating for FRGE unchanged.

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