Avanza AZA
August 11, 2021 - 1:38pm EST by
Par03
2021 2022
Price: 320.00 EPS 0 0
Shares Out. (in M): 155 P/E 0 0
Market Cap (in $M): 5,700 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 5,700 TEV/EBIT 0 0

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Description

Avanza is Sweden’s leading discount brokerage with a 6% share of Swedish savings.  I’m recommending it as a long. 

Avanza’s current TAM is the ~11 trillion SEK Swedish savings market.  About 90% of this market is still invested with legacy banks and insurance companies.  Avanza has 6% share of these assets, with fellow discount brokerage competitor Nordnet claiming another 3%.

The legacy banks and insurance companies Avanza is primarily competing with typically offer clunky user interfaces, a limited menu of funds and investment options, and high and complex pricing.  In contrast, Avanza offers a superior customer interface (best website and mobile app), a broad menu of investment options (stocks, including both Swedish and international securities, ETFs, >1300 mutual funds, etc.), and competitive, simple pricing.

Avanza’s formula is a simple one, but they execute it very well.  If you read Avanza’s annual report and listen to management, you’ll hear them repeatedly talk about their customer focus.  A lot of companies say things like this, but having followed this company for a while, I’ve become convinced that they “walk the walk” in this area.

I should emphasize here that Avanza’s value proposition is not based just on pricing.  Avanza’s initial strategy 20 years ago was to undercut the incumbents on price, but Avanza is no longer the cheapest brokerage service in Sweden.  Avanza hasn’t lowered its prices since 2014.  Since then, competitors have changed their pricing – DEGIRO entered the Swedish discount brokerage market in 2015 with grand plans of building significant market share based on low pricing, but they were unable to gain any traction.  Some of the large banks in Sweden started lowering their brokerage fees in 2017, but that has had no discernable impact on Avanza’s inflow rates, client growth, market share gains, etc.

Avanza outpaces all of its competitors in Sweden both in retaining existing customers and winning new ones.  Avanza’s customer churn averages 1% annually.  Avanza has been ranked #1 for “most satisfied” customers for 11 straight years.  They boast a Net Promoter Score of 67 versus an industry average of 10.

As a result, Avanza has been a relentless market share gainer:

Their product sells itself:

 

And there is a long runway left for future share gains.  While Avanza currently has a 6% share of the Swedish savings market, their share of Swedish inflows has recently approached 20%:

They generate both transactional revenue (commissions on customer trades and currency-related income from customers trading in non-SEK-denominated investments) and non-transactional revenue (fees remitted to Avanza on client AUM invested in third-party funds, fees charged on client AUM invested in Avanza funds, and net interest income generated on margin loans, idle client cash, etc.).

As you can probably guess, transactional revenue can vary based on the environment.  Avanza’s revenues over the last year have been boosted by the frenzied retail trading environment:

 

That will surely normalize from here.  Below is a back-of-the-envelope calculation of Avanza EPS 5 years from now assuming some normalization of revenue per customer.  It’s easy enough to plug in your own assumptions here and see what kind of EPS estimates you can arrive at.

Will Avanza outperform over the next year?  Maybe, maybe not.  The environment over the past twelve months has been about as good as it gets for Avanza – customer growth for brokers everywhere has been high, and retail trading activity has been elevated.  So Avanza will indeed face a near-term headwind from the environment normalizing.

Over the long-term however, I expect EPS will track in excess of customer growth/AUM growth.  Ultimately, I’m making a “stronger for longer” case with Avanza, as I think there is a very long runway for continued double-digit growth in Sweden, with potential additional growth coming from if/when Avanza expands to other geographies. 

Avanza management is frequently asked about geographic expansion – here’s what they had so say about that topic on the last earnings call:
“I think that’s always a debate we have.  But I would say, for the next couple of years, we are very focused on staying in Sweden.  My personal belief is that we can triple or quadruple the size of Avanza given the Swedish market.  We have 6.2% market share.  We have a lot of things to do in Sweden.  So when we reach, just visionary, 20% market share or 15% market share, I think that debate will be more suitable.  But I would point out that it’s not given that it is the Nordic countries that would be the next country for Avanza.  But I think it’s a few years down the road before we take that discussion.”

Q&A
In the US, price wars among the brokers have driven commissions to zero for most trades – why won’t the same thing happen in Sweden/Europe?
There are a couple differences between the US discount brokerage market and the European discount brokerage market that make the risk of price wars/Robinhood/”zero fee” models much lower in Sweden (and most of the rest of Europe).  First, US brokers make the vast majority of their revenue from interest on idle client cash, with a secondary source of revenue from payment-for-order flow.  Therefore it makes sense for US brokers to treat brokerage commissions as a “loss leader” to bring in for customers to generate net interest income and PFOF.  In contrast, European brokers make hardly anything on net interest these days (due to negative rates), and regulators in Sweden (and most European countries) don’t allow payment-for-order flow, so European brokers therefore don’t treat brokerage commissions as “loss leaders.”  The Robinhood model doesn’t work well in Avanza’s market. 

Second, discount brokerage penetration is much lower in Europe than in the US.  In the US, discount brokers like Schwab, Robinhood, etc. are increasingly fighting each other over the same customers.  Europe is more like the US 20 years ago – most investors still do their financial transactions with an incumbent bank.  Avanza (and other discount brokers in Europe) are primarily competing against legacy banks and insurance companies (which have ~90% of the market in Sweden).  These incumbents are fundamentally bureaucratic, slow-moving, not very innovative, and not laser-focused on their brokerage offerings (which are just one small part of their overall businesses).  And these incumbents usually have their own asset management arms, so they only offer their own products (unlike Avanza, which offers a broad menu).

Why own Avanza versus one of the other discount brokers in Europe, such as Nordnet, flatexDEGIRO, et al.?
While I think the entire European discount brokerage landscape is a good hunting ground, Avanza is probably my current favorite.  Chalk it up to management, culture, brand name or something else, but Avanza typically outpaces Nordnet in terms of customer growth in its home Swedish market (unlike Avanza, Nordnet also has operations in Sweden, Norway, Finland, and Denmark); I’m more comfortable owning the head-to-head winner. 

flatexDEGIRO might have the most upside of the group, as they are putting up some astronomical client growth figures as they attempt to become a pan European discount broker.  I worry a bit more about the long-term sustainability of flatexDEGIRO’s customer growth and profitability however.  Whereas Avanza’s customer value proposition is based on more than just pricing, I think flatexDEGIRO is winning mostly on price.  And I also worry that flatexDEGIRO is over-indexed to the wrong type of customer.  The distinctions aren’t black and white, but brokerage customers can be grouped along a spectrum from “gamblers” to “savers”.   Gamblers typically have low account sizes, hold volatile assets, and trade frequently.  Savers typically have larger accounts sizes, hold mutual funds and ETFs in additional to individual securities, and trade less frequently.  Whereas Avanza skews more towards Savers, I worry flatexDEGIRO skews more towards Gamblers.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 

  • Continued double-digit growth in clients and AUM

  • Regulatory changes making it easier for Swedes to transfer occupational pension accounts from incumbent insurance companies to discount brokers like Avanza.

    • Most occupational pension schemes in Sweden (analogous to 401Ks in the US) are invested with insurance companies.  Historically, these insurance companies have charged both high recurring fees and high account transfer fees, which penalized customers for transferring their pension accounts to a lower cost option.

    • In April of this year, Sweden enacted a new law capping transfer fees on these accounts – this will make it much easier for clients to move these accounts to Avanza.

    • Occupational pensions represent ~35% of the SEK 11 trillion savings market that is Avanza’s current TAM, but Avanza only has 1% share of this bucket.

    • It takes months for occupational pension account transfers to process, so inflows from such transfers likely won’t start showing up until later this year, but this law change makes a large chunk of Avanza’s TAM much more accessible.

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