Futu Holdings stock has fallen sharply over the past year, yet the intrinsic value estimate from the Excess Returns model and the market multiples both point to the shares trading at a discount to fair value.

• Over the last 3 years, Futu Holdings has returned 130.1%, which sets a strong recent track record compared with its weaker shorter-term share price performance.
• Expectations for continued growth in its online brokerage and wealth management operations can support the current valuation. However, any slowdown in client activity or higher regulatory and compliance costs may weigh on what investors are willing to pay.
• Futu Holdings screens as undervalued under most of Simply Wall St's checks, with the stock passing 5 of 6 valuation tests on the value score.

The issue now is whether that apparent discount offers a margin of safety after the recent volatility in Futu Holdings' share price.

Is Futu Holdings Still Cheap on Excess Returns?

The Excess Returns model estimates what Futu Holdings can earn on its equity over and above the required return that shareholders expect. For Futu Holdings, the model uses a book value of $293.86 per share and a stable EPS estimate of $93.40 per share, based on weighted future Return on Equity estimates from 12 analysts.

With a cost of equity of $37.41 per share, the implied excess return is $55.99 per share, supported by an average Return on Equity of 21.66%. The model also uses a stable book value of $431.13 per share, based on projections from 9 analysts, to capture the effect of reinvesting profits at these returns.

Putting these assumptions together, the Excess Returns valuation points to an intrinsic value of about $198 per share. This is around 45.0% above the current share price implied by the model. On this basis, Futu Holdings stock currently screens as undervalued.

Our Excess Returns analysis suggests Futu Holdings is undervalued by 45.0%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Is Futu Holdings Still Cheap on Earnings?

The P/E ratio is a useful way to think about what you are paying today for each dollar of Futu Holdings earnings. For a profitable online broker like Futu Holdings, it gives a direct read on how the market values its earnings compared with peers.

Futu Holdings currently trades on a P/E of about 11.9x. This is well below the Capital Markets industry average of 37.8x and also under the peer group average of 27.3x. A tailored fair P/E of 20.9x, which reflects the company’s earnings profile, size and risk, sits between these benchmarks. The gap from this fair multiple to the current 11.9x indicates that the market is applying a sizeable discount to the stock on earnings.

On the P/E multiple alone, Futu Holdings stock appears undervalued compared with both its industry and the level implied by the fair ratio.

The Futu Holdings Narrative: What Would Justify Today's Price?

Simply Wall St Narratives connect the valuation puzzle around Futu Holdings to clear, testable stories about what might happen to its growth, margins and earnings in the years ahead, and what that could mean for the stock’s value relative to today’s price. Each narrative links a fair value to a particular mix of potential catalysts and risks, allowing you to track over time which version of Futu Holdings' story appears to be unfolding.

One of the top community narratives on Futu Holdings: 50% undervalued

"Futu's leadership in digital asset innovation exemplified by being the first Hong Kong broker to distribute tokenized money market funds and its ongoing push to secure exchange licenses in multiple global jurisdictions positions it to capture outsized market share in digital wealth management and crypto…"

Do you think there's more to the story for Futu Holdings? Head over to our Community to see what others are saying!

The Bottom Line

Futu Holdings screens as undervalued on both the Excess Returns intrinsic value estimate and its current P/E multiple, which reinforces the idea that the stock trades at a discount rather than throwing off conflicting signals. The crux for investors is whether Futu Holdings can sustain the profitability and returns on equity that underpin the intrinsic value estimate while keeping regulatory and compliance risks contained. If those assumptions hold and earnings remain resilient, the current discount could prove appealing. If they do not, the market may simply be pricing in a higher risk profile that limits any re rating in the near term.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.