Futu Holdings (NASDAQ:FUTU) Stock: Is the Chinese Fintech Company a Buy?

While there have been several negative headlines impacting Chinese equities this year including things like delisting threats and antitrust concerns, it seems that investors are still very interested in adding shares of companies that are located in the fastest-growing economy in the world. It is very important for investors to fully understand the potential downsides of buying stocks in emerging markets, but the truth is that many of these companies have room for growth that might make them worth taking on some added risk.

With so many Chinese stocks on the move lately, it’s easy for investors to let some of the lesser-known companies go unnoticed. One stock that went public last year has performed very well lately and might even become a household name in the coming months. Futu Holdings (NASDAQ:FUTU) is a fintech company that offers a fully digitized brokerage and wealth management platform. The stock is up over 330% this year and could be a good option for investors that are interested in adding exposure to a rapidly growing Chinese company. Here are more details on why Futu Holdings stock is worth monitoring.

Potential to Become China’s Biggest Mobile Brokerage App

As an investor, you probably know just how important it is to have a brokerage platform that is reliable, commission-free, and user-friendly. That’s why Futu Holdings is an interesting company, as it runs one of mainland China’s biggest mobile stock trading applications. Futu Holdings helps people to buy and sell Hong Kong, Chinese, and U.S. listed stocks with its proprietary platform called Futubull. New Futu Holdings users can open an account remotely in 3 minutes and begin trading. The company also offers wealth management, margin financing, and financial information services and is Asia’s top-ranked online broker.

Futu Holdings’ main target market includes the emerging affluent Chinese population and the company primarily generates revenue through fees from trade execution and margin financing. It is backed by Tencent Holdings (OTCMKTS:TCEHY), a strong Chinese social media company that owns a 33% stake. Futu Holdings is focused on creating a unique user experience by implementing social media to create a network that connects its users to other investors, companies, analysts, and key thought leaders. It’s clear that Futu Holdings is attracting new clients, as the company already exceeded its full-year growth target for paying clients in Q2.

Strong Q2 Earnings

One of the big reasons why Futu Holdings has been performing well in the market this year has to do with its exponential growth. The company was already seeing earnings growth prior to the pandemic, and the COVID-19 crisis seems to have accelerated things for the company. Futu Holdings reported strong Q2 earnings back in August that saw its total revenues increase by 164.6% year-over-year to $88.7 million. The company also reported impressive Q2 Net Income growth of 327.7% year-over-year.  

When it comes to assessing a brokerage firm, it’s best to look at metrics like the number of paying clients, the number of users, and trading volume. Q2 confirms that more and more people are looking to this tech-driven online brokerage company to handle their investing needs. The total number of paying clients for the company increased by 84% year-over-year while its total number of users increased by 52.1% year-over-year. Total client assets saw a large increase of 108.4% year-over-year in Q2 as well. The numbers that really stand out for Futu’s second quarter are the total trading volume and Daily Average Revenue Trades. Total trading volume increased by 202.1% year-over-year while DARTs increased by 142.4% year-over-year which confirms that more people are trading with Futu than ever before.

Is Futu Holdings Stock a Buy?

There’s certainly a good chance that Futu Holdings becomes the premier online brokerage in China, but it’s important to consider the circumstances that may be driving the company’s growth at this time and whether or not it can keep up the rapid pace. Much like many of the brokerage firms in the U.S., Futu Holdings is likely seeing increased trading volumes as a result of the pandemic. That could mean that the large trading volumes are only temporary.

Futu Holdings has been a huge winner this year, but it’s difficult to recommend adding shares at this time. The stock is absolutely worth watching going forward, but after the massive rally, a big pullback is likely on the horizon. Investors that are interested in the company for the long-term would likely be better off to wait until after the company reports its Q3 earnings on November 19^th to make a decision on whether or not it’s worth adding.