Is Futu’s bull run nearing an end?

The brokerage’s stock has more than doubled since the start of the year, as it records strong revenue and profit growth fueled by heavy trading volumes

Key Takeaways:

• Futu reported its revenue rose 70% in the second quarter, as its profit more than doubled on surging interest in stock trading
• A growing number of short sellers are betting the stock brokerage’s shares may be due for a correction after a 120% rally since the start of the year

By Doug Young

Leading stock brokerage Futu Holdings Ltd. (FUTU.US) has been charging ahead lately, making big bucks off its core audience of mostly Chinese investors buying surging U.S.- and Hong Kong-listed stocks. The company strutted its stuff once again on Wednesday, as it reported strong double- and even triple-digit gains for most of its major business metrics, boosted by rallying stocks markets in the U.S. and Hong Kong.

Futu’s own shares rallied 6% on Wednesday after the announcement, nearing an all-time high reached in 2021 when U.S.-listed Chinese stocks were surging. The company revealed that part of its bounty during the second quarter came from a spike in its business lending shares to short sellers. While it didn’t specify which companies traders were shorting, we suspect many were probably U.S.-listed Chinese stocks that are familiar to many of Futu’s customers but are relatively unknown to most other U.S. stock traders.

That brings us to the question of whether short sellers may be betting on Futu’s own stock to undergo a correction after its latest run-up. While we don’t know if Futu makes its own shares available for short sellers, the stock appears to be a growing favorite among such investors betting on a correction. Nearly 2% of its publicly listed shares are currently being traded by short sellers, more than double the less than 1% being shorted back in April, according to data from Bloomberg.

Futu’s business metrics are indeed impressive, as the company targets Chinese people living outside China, as well as other local investors in its core markets of Hong Kong, Malaysia, the U.S., Singapore, Japan and Australia. Like many brokerages, the company is benefitting from a bull market that has seen the S&P 500 and Hang Seng indexes in its core trading markets of the U.S. and Hong Kong rise 8.5% and 25% so far this year, respectively.

The analyst community is also quite enamored with Futu. Of the 14 polled by Yahoo Finance, only one doesn’t rate the company a “buy” or “strong buy.” But those analysts’ target prices for Futu’s stock tell a different story. The Wednesday post-earnings jump saw the stock close at $178.66, or about 6% higher than the average price target of $168.72 from the analyst group.

Analysts are typically quite bullish on the stocks they cover, often setting price targets that are 20% to 30% higher than the actual prices. That probably means Futu’s stock has run up so much recently that the analysts haven’t had time to raise their price targets, even though most are still telling investors to buy the shares. Indeed, Futu’s stock is up 120% so far this year as investors applaud its big gains. Following the run-up, the stock now trades at a price-to-earnings (P/E) ratio of 30, well ahead of the 23 for UP Fintech (TIGR.US) and a meager 12 for Webull (BULL.US), which have similar profiles targeting Chinese investors living abroad.

Interest in shorting

Having given our thesis for why Futu’s stock may be due for a correction, we’ll take a deeper dive into its latest earnings report, which really does look quite impressive. The company’s revenue rose 70% year-on-year to HK$5.31 billion ($680 million) during the quarter, which looks strong, but was also notably down from the 81% growth it reported in the first quarter. Company officials pointed out that trading sentiment took a hit in April, when U.S. and Hong Kong stocks briefly tanked as Donald Trump rolled out a wide range of tariffs on U.S. trading partners.

Within the broader revenue figure, broker commissions and handling charges rose 87% year-on-year to HK$2.58 billion, accounting for nearly half of all revenue. The company noted the big jump came on a 121% surge in its trading volume for the quarter, which was partly offset by lower commission rates.

In one notable trend, Futu’s trading volume for U.S. stocks, which accounts for three-quarters of its total, rose 19.7% quarter-on-quarter, which is what you would expect in such a bull market. But its volume for Hong Kong stocks, which account for most of the other trading volume, actually fell 9% quarter-on-quarter. Futu blamed that decline on waning investor interest in the growing number of Hong Kong-listed tech stocks, many of which previously would have made U.S. IPOs before China-U.S. tensions began to flare.

Futu’s other main revenue source, from interest income, rose by a milder 44% year-on-year to HK$2.29 billion. Commenting on how the company could maintain such growth despite falling interest rates globally, CFO Chen Yu pointed out that Futu benefited from having some “hard to borrow” stocks in its portfolio that attracted short sellers, which we’ve previously suggested might refer to U.S.-listed Chinese stocks.

Quite a few U.S.-listed Chinese stocks have rallied strongly this year, including Futu’s, as well as some others that we’ve written about like wearables maker Zepp (ZEPP.US) and online education company QuantaSing (QSG.US). While many of these companies were hugely undervalued, some may consider the equally huge rallies for their stocks, some of which rose manyfold in just a few months, as too much too quickly.

Futu also said it achieved a relatively major milestone during the quarter as more than half of its total funded accounts, which refers to paying customers, were for clients outside of its home base of Hong Kong. The company’s number of funded accounts rose 41% year-on-year in the second quarter to 2.88 million. While Futu doesn’t break down funded accounts by market, remarks by officials suggest that Hong Kong and Malaysia are its biggest markets, followed by the U.S. and Singapore, and lastly Japan and Australia.

Futu’s costs rose just 16.8% year-on-year during the quarter, while its operating expenses were up by 20.6% – both well below its revenue growth. As a result, the company’s net income rose 113% to HK$2.57 billion.

The bottom line for Futu is that it continues to grow quite rapidly, though such growth could ground to a halt at any time if U.S. and Hong Kong stock market rallies run out of steam. When that happens, the company’s overpriced stock will inevitably follow the market downward. The big question is when exactly that will happen.

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