AJ Bell: a fine British fintech going cheap

I’ve been tracking the financial technology (fintech) sector for a decade now. It strikes me that three significant changes are underway. The first is the rise of cryptocurrency and all the digital assets associated with it, which requires little explanation.

The second is the advent of “neobanks”, or purely digital banks, such as Starling and Monzo. And then there’s the ascendancy of online investment platforms, also known as online brokers.

The first stage of this revolution began long ago. I’m old enough now to remember the rise of fund supermarkets such as Hargreaves Lansdown in the 1980s, after financial deregulation. Every few weeks, a new newsletter arrived in my mailbox, and I’d phone to buy some funds or stocks. Today, trading shares (and bonds) has shifted almost entirely online.

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Investors have woken up to the fact that arguably the most profitable part of the internet and e-commerce boom has been investment and share trading. First came the initial public offering (IPO) of firms such as Robinhood in the US, which experienced a dramatic surge in customers between mid-2020 and mid-2021. The number of funded accounts (those with money deposited in them, not merely opened) grew from 13 million to 22.5 million. Since then, growth has continued at a more modest pace, reaching over 25 million by the end of 2024.

Going global

More recently, we’ve witnessed the rapid rise of a firm called eToro. This fast-growing Israeli-based company listed on the US markets a few weeks ago. It has proved enormously popular with both users and investors in the US. They value the firm at well over $5 billion on a forward price/earnings (p/e) ratio of 28.

The group achieved $12 billion in sales in the last financial year – an increase of 276% year on year. The firm manages assets worth $16 billion, with 3.5 million funded accounts worldwide. Active online share dealing has become a worldwide marketplace. Crucially, crypto trading is set to account for 37% – 43% of revenues in 2024. eToro may be the brash new kid on the global online trading block, but the epitome of a global trading fintech giant is a platform called Interactive Brokers, or IBK (Nasdaq: IBKR). This is the fintech behemoth that no one has heard of, at least in the UK.

The online-brokerage firm’s relentless focus on its global platform, broad product offering and competitive pricing has attracted a surge of new clients, pushing its total number of accounts from 690,000 at the end of 2019 to a staggering 3.79 million by the end of May 2025. The group is worth more than $85 billion.

IBK’s shares trade at a multiple that is roughly the same as eToro’s. It has also been aggressively expanding globally. Its UK operation now boasts competitive offerings not only in its core advanced trading products, but also in ISAs and Sipps. I’ve started using IBK and can attest to the sheer sophistication of its platform, although its not exactly an easy platform to navigate.

IBK’s steady move into the UK market is noteworthy: it thinks there’s an opportunity. And plenty of other firms agree. Only a few months ago, IG Group, which built its profitable business on spread betting, bought Freetrade, an online-dealing platform, to expand its share-dealing offering. Competition is hotting up as the UK share-dealing market grows fast. In 2015, the market size was approximately £586.9 million. By 2024, this figure had rocketed to £2.12 billion, with £2.28 billion pencilled in for 2025. The value of the online-brokerage market has more than tripled in just under a decade.

This brings me to AJ Bell (LSE: AJB). Since Hargreaves Lansdown was acquired by private equity, this Salford-based UK fintech has become the City’s favourite investment e-commerce platform, boasting assets under administration of £90 billion. That figure is many times greater than eToro in the US. eToro’s total market capitalisation is just under $5 billion, while AJ Bell’s market cap is slightly over $2.6 billion, so just over 50% of the US firm’s value, but it has many times more assets under administration.

AJ Bell trades at 20 times earnings, with analysts forecasting revenue growth of 20% in the coming year. Earnings per share (EPS) are expected to grow by 16% in the current financial year, although that growth rate slows to single digits over the next two years. This slowdown is partly due to a reduced pace of expansion in the number of customers attracted to the platform over the past two years. Nonetheless, the firm’s return on equity has remained steadily above 35%-45%, with a net income margin also consistently above 25%.

I’ve gone into some detail about AJ Bell and its key financials because, yet again, I think we’re witnessing a classic example of British exceptionalism – of the negative variety. The big story for UK equities in aggregate is that we undervalue our most successful businesses, and at some point, the outside world notices (be they US, Asian or private equity), swoops in and buys the assets on the cheap.

The worry among some investors at AJ Bell has been that customer growth is slowing, but surely that’s in part a function of the UK’s risk-averse investor/saver culture, which is more inclined towards cash ISAs than stocks and shares ISAs.

However, that is slowly but surely changing, with the government increasingly determined to encourage savers to invest, mirroring broader trends in the US and other European countries where the incentives for investing over saving are more prevalent. And in the meantime, rather like IBK in the US (another very solid, relatively undervalued stock), in AJ Bell we have a significantly undervalued British business with an excellent financial base.

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