Amongst the wider market sell-off, the Praemium Limited (ASX: PPS) share price has fallen 44% in the past 3 months.
Why has the Praemium share price fallen?
Praemium is a fintech company that provides investment administration and platforms in Australia, the UK, and international markets. The company's integrated managed account platform uses proprietary technology to allow advisers and investors to "reconstruct" their portfolio daily. The proprietary technology allows for quality performance and tax reporting, giving Praemium a competitive advantage.
Praemium is operating in a large market that is currently dominated by incumbents. Companies such as Westpac Banking Corp (ASX: WBC) and AMP Limited (ASX: AMP) still retain hundreds of billions in funds under administration (FUA). The total addressable market is around $850 billion. The Royal Commission is adding a strong tailwind for Praemium, as we see a structural shift away from the big banks, towards specialty platform providers. The superannuation and pension industry should also provide a tailwind for the company.
At the end of September Praemium commanded $8.5 billion in FUA. This represents growth of 29% over the past 12 months. The strong growth in FUA resulted in revenue growth of 22% and underlying EBITDA growth of 40% in FY18. This revenue growth is consistent with the cumulative average growth rate of 23% over the past 5 years. As an investment software and administration business, the company should continue to see an incremental expansion of its gross profit margin. The FY18 gross margin was 81.2%, up from 79.3% in FY17. As competition increases over time, the company may need to invest heavily in research and development or may be required to reduce its prices in order to grow market share. Both situations would put pressure on margins and so should be monitored.
Although growth stocks such as Praemium are often hit the hardest when the market dips, the company currently trades at 93x earnings. This is well above the market average of 16/17x earnings, but below its competitor Hub24 Ltd (ASX: HUB) which currently trades at 103x earnings.
Foolish Takeaway
Given the size of the independent managed platform industry, there may be many winners. Praemium is a quality business that is growing both revenue and earnings at a fast rate. The company's share price should do well over the long term, but with such a high earnings multiple there may be more volatility to come.
