Morningstar suggests Netwealth is over-valued

Research and ratings house Morningstar has issued a sober analysis of platform provider Netwealth suggesting the market may have underestimated the impact of an increasingly competitive platform market.

In an analysis issued after Netwealth’s full-year results his week, Morningstar suggested the company’s shares “remain significantly overvalued at current prices, and referenced just how competitive the Australian platforms market has become.

“We recognize Netwealth’s strengths, such as its technological capabilities and strong user advocacy relative to most other platforms, which should support solid net inflows over our five-year forecast period,” the analysis said. “However, the market appears to overlook the trade-off between volume growth and margins in the increasingly competitive platform market.”

“With shares trading at over 50 times our projected earnings per share for fiscal 2025, the market seems to be underestimating the earnings risks associated with a capital markets-exposed platform like Netwealth.”

The Morningstar analysis said that Netwealth management expects a further increase in the rate of expense growth in fiscal 2025 – something which indicates business expansion requires corresponding investments to enhance the company’s value proposition.

It suggested that this was something the market may be underestimating.

“The decline in platform fee margins is also likely to persist. The firm attributed this to fee caps as account sizes grow, which we think is akin to having to maintain attractive pricing given competitive pressures,” the Morningstar analysis said pointing to the major institutional platforms having uniformly restructured and reduced their product fees to keep up with the competition.

“We forecast EBITDA margins to expand slowly to around 55% by fiscal 2028, compared with the five-year historical average of 50%.

Volume growth, seen through continuous fund transitions from both new and existing clients, is expected to drive revenue growth that outpaces expenses. However, we anticipate margin growth will cease in the long term due to the increasingly commoditised nature of the platform market, which will exert structural pressure on fees and necessitate significant reinvestment—offsetting scale benefits from volume growth,” the analysis said.