TIGR - UP Fintech: Too Early To Be Bullish

2023-04-03 10:41:45 ET

Summary

• UP Fintech Holding Limited's shares went up by +10% in the last three trading days, thanks to its above-expectations Q4 2022 financial results.
• However, some of UP Fintech's key operating metrics for the recent quarters weren't as good as what one would have hoped for.
• My rating for UP Fintech remains a Hold, as the company's diversification plan is still a work in progress.

Elevator Pitch

UP Fintech Holding Limited ( TIGR ) stock is rated as a Hold. I previously initiated coverage of TIGR with my December 2, 2022 article for the company.

My view is that it is premature to turn positive on UP Fintech. While TIGR's recent quarterly financial results exceeded expectations, its lackluster operating metrics and the need for further diversification imply that the road ahead for UP Fintech is still bumpy. As such, I choose to leave my Hold rating for UP Fintech unchanged.

Market Responded Positively To TIGR's Recent Results Announcement

On March 29, 2023 before the market opened, UP Fintech released the company's Q4 2022 and full-year FY 2022 financial results .

TIGR's share price jumped by +8% from $3.00 as of March 28, 2023 to end the March 29, 2023 trading day at $3.24. UP Fintech's stock continued to rise in the next two trading days, closing higher at $3.30 as of March 31, 2023. In aggregate, TIGER's shares have gone up by +10% in the three trading days following the company's earnings release.

In the subsequent sections of this article, I touch on the positives relating to TIGR's results disclosure that led to its recent share price outperformance, and I also highlight negatives or risk factors that investors should be aware of.

UP Fintech's Q4 2022 Performance Was Above Expectations

Revenue for TIGR grew by +3% YoY and +15% QoQ to $63.9 million in the last quarter of the previous year, and this turned out to be +14% higher than the sell-side's consensus top line estimate of $56.1 million (source: S&P Capital IQ ). UP Fintech also turned around from a net loss attributable to shareholders of -$5.4 million in Q4 2021 to generate a positive net profit of $1.2 million for Q4 2022. The company's actual recent quarterly bottom line was more than double the analysts' consensus bottom line forecast of around $590 million as per S&P Capital IQ data.

A rising rate environment and good cost management were the key factors that drove UP Fintech's better than expected results in the most recent quarter. TIGR's interest income surged by +50% YoY from $20.3 million for Q4 2021 to $30.4 million in Q4 2022. Separately, the selling, general, and administrative (SG&A) expenses-to-revenue ratio for UP Fintech declined from 86.1% in Q4 2021 and 73.5% in Q3 2022 to 70.3% for the recent quarter.

TIGR's substantial Q4 2022 earnings beat provides justification for the stock's excellent post-results announcement share price performance.

But Certain Operating Metrics Were Poor

UP Fintech's Q4 2022 financial performance was reasonably good as detailed in the prior section, but some of the company's operating metrics in the recent quarter were disappointing.

Firstly, the number of new funded accounts for UP Fintech dropped significantly by -56% YoY to 27,300 in the fourth quarter of last year.

Secondly, client assets per funded account decreased by -29% YoY to approximately $17,921 for the recent quarter.

Thirdly, TIGR's trading volume for equities fell by -39% YoY and -13% QoQ to roughly $20,453 million in Q4 2022. UP Fintech also witnessed a -12% QoQ decline and a -20% YoY decrease in total trading volume (which includes equities and derivatives) to $68,542 million for the final quarter of the previous year.

These operating metrics suggest that weak market sentiment has had a negative impact on UP Fintech's business operations.

Diversification Is Still A Work In Progress

In my December 2, 2022 write-up for TIGR, I noted that UP Fintech has been "diversifying its funded account base away from Mainland Chinese clients." About 10% of new funded accounts for UP Fintech in the fourth quarter of 2022 and full-year 2022 were still sourced from Mainland China, as per its disclosures at its Q4 2022 earnings call on March 29, 2023.

I highlighted in my earlier March 9, 2023 article for TIGR's peer, Futu Holdings ( FUTU ), that the China Securities Regulation Commission "doesn't approve of cross-border brokers" such as TIGR and FUTU "opening new trading accounts for Mainland Chinese investors." At its fourth quarter results briefing, UP Fintech also revealed that "stopped accepting new clients from Mainland China" at the end of last year. In other words, UP Fintech will have to compensate for the loss of new funded accounts from Mainland China in subsequent quarters by being more aggressive in its client diversification activities.

UP Fintech is in a tough situation. If TIGR fails to attract more new funded accounts from markets outside Mainland China, it will be difficult for the company to deliver meaningful new funded account growth for 2023 and beyond. But assuming that UP Fintech takes a more aggressive stance towards client diversification, TIGR will have to pay the price of weaker profit margins with the ramp up in marketing. UP Fintech admitted that it has a tough balancing act, noting at the most recent quarterly results call that it will try to focus on both "CAC" (Customer Acquisition Costs) and "ROI" (Return On Investments) in relation to expansion in markets like Hong Kong.

Concluding Thoughts

In my opinion, UP Fintech Holding Limited's shares are deserving of a Hold rating. The stock's recent share price outperformance has already priced in TIGR's better than expected financial performance. Looking forward, UP Fintech has to continue diversifying to compensate for the absence of new Mainland Chinese clients in the future. Also, some of the company's Q4 2022 metrics indicate that market sentiment remains weak, which could potentially hurt UP Fintech Holding Limited's results in subsequent quarters.

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