Netwealth: Product Enhancements Likely Replicable

We retain our fair value estimate on Netwealth NWL at AUD 10.10 per share. Despite shares falling over 7% following the update for the first three months of fiscal 2024, which was broadly as expected, shares remain overvalued. The market is likely overlooking the trade-off between Netwealth’s revenue growth and margin expansion. We continue to forecast Netwealth’s market share gains to be slower than in the past five years due to resurgent competitive pressures. Moreover, we expect ongoing growth investments and fee compression to limit margin expansion.

We expect Netwealth’s fund flows to improve from cyclically depressed lows in fiscal 2023 starting fiscal 2024. Custodial net inflows over the 12 months to September 2023 were AUD 8.9 billion, and we forecast a recovery to around AUD 13.2 billion per year over the five years to fiscal 2028.

However, there are challenges for it to keep meeting market expectations for simultaneous gains in market share and margins. Fees may compress materially from current levels due to the commoditized nature of its product. The replicability of its offerings suggests strong competition for client funds will persist.

Netwealth has recently introduced a cost-effective “Core” platform and will be launching a cash fund that offers higher interest rates than its platform cash account. Moreover, it has continued to expand the number of investment options, most recently including private market funds and term annuities. These efforts closely resemble recent endeavors by its peers—for example, Hub24, which will be launching a cheaper “Discover” platform and distributing Allianz’ retirement income product. We also note AMP launched its own retirement income product in late 2022, MyNorth Lifetime which is accessible via its MyNorth platform.

These industry developments will likely prevent Netwealth from building a durable competitive advantage, underpinning our no-moat rating.