Shares in global financial technology company IG Group (IGG) fell by 2.5% to 763p despite announcing another positive trading update.
The market has taken fright at management guidance that revenue growth for Tastytrade, its US online brokerage and investor education platform, will miss the previously guided 25-to-30% range for 2022.
There were fears that the $1 billion price tag IG Group paid for TastyTrade was excessive. At the time the deal (21 January 2021) was justified on the basis that the US options and futures market was the largest in the world, commanding high margins.
However US options trading volumes have slowed, a trend that has continued into the start of the fourth quarter, prompting management’s cautious guidance.
EARNINGS POTENTIAL QUESTIONED
There are two specific negative implications from lowered management guidance relating to Tastytrade. First, the market is likely to question its earnings power. Second, it may reawaken concerns that IG Group significantly overpaid for the asset.
Arguably much of this has already been priced into the current valuation.
IG Group is trading on a forward price-to-earnings ratio of 9.4 times. This is near the bottom of its historical valuation range, and compares with a long-term average of 15 times.
RESILIENT THIRD QUARTER
Third quarter 2022 net trading revenues increased 13% year-on-year to £257 million against a tough comparative. The number of active clients increased 32% year-on-year to reach an all time high of 292,000.
The statement highlights strong trading in commodities and indices, with the UK and EU reporting the highest quarterly revenue since the fourth quarter of 2020.
Full year group revenue for 2022 is expected to moderately exceed current market expectations.
