EasyEquities has enjoyed exceptional uptake since 2014, but growth is slowing, and deposits per account are decreasing. These factors have put pressure on the Purple Group share price.
EasyEquities is South Africa’s best-known online investment platform for retail investors and is owned 70% by Purple Group and 30% by Sanlam.
It is the most valuable asset in Purple Group’s stable and helped the company to rapidly increase its share price between 2020 and 2021.
One of the reasons is that EasyEquities’ profit before tax turned positive (R12.4 million) for the first time in 2020, and jumped to R98.1 million in 2021.
It also reported strong growth in its registered clients and the number of new accounts opened.
Unfortunately, EasyEquities financial results for the year ended 31 August 2022 were not as impressive as the previous two years.
For the first time since 2017, EasyEquities reported a decrease in its profit before tax declining from R98.1 million to R80.31 million. It also experienced a slowdown in revenue growth.
Purple Group CEO Charles Savage upbeat about results
Purple Group CEO and EasyEquities founder Charles Savage was upbeat about the results, saying it was a great performance in the current economic conditions.
One of the aspects Savage focused on was client cohorts – all clients added in a specific year.
He explained that cohorts become profitable within two to three years. In other words, the client group registered in 2014 will only become profitable in 2016 or 2017.
He highlighted that 500,000 of EasyEquity’s 763,233 active clients are still unprofitable.
When these clients become profitable in the next two to three years, they can potentially generate an additional R100 million in profits.
This calculation is based on the lowest profit cohort, with 500,000 clients generating R200 profit per year.
However, there are many assumptions linked to the R100 million profit predictions.
It assumes the client profiles mimic historical behaviours, that the 500,000 clients will remain active, and that the cost to serve a client will not increase.
In the sections below, we delve into each of these questions.
EasyEquities funded accounts
EasyEquities has reported on its number of funded accounts – accounts that have money in them – since 2016.
Funded accounts increased from 21,000 in 2016 to 966,300 accounts in 2022.
Between 2016 to 2021, the lowest growth EasyEquities experienced in funded accounts was 61%. In 2020, growth was 135%, and in 2021, numbers grew by 183%.
Growth slowed dramatically in 2022. Over the last financial year, EasyEquities only experienced a 31% growth in funded accounts.
Deposits per active account
Since 2016, EasyEquities has seen a significant increase in its annual deposits. Between 2016 to 2021, the average growth in annual deposits was 100%.
However, over the last financial year, annual deposits only grew by 6%.
Another way to look at it is the average annual deposits per active account. It shows a downward trend.
It is an indication that the user profile of EasyEquity users is changing. The income level of newly opened accounts is likely lower than the early adopters.
Operating cost and revenue per account
EasyEquities managed to reduce its operating cost per funded investment account – from R1,500 per account per year in 2016 to R172 per account per year in 2022.
However, the cost per account increased from R144 to R172 over the last financial year.
It means EasyEquities is starting to spend more per active account, hurting the company’s bottom line.
Another negative trend is revenue per funded account.
EasyEquities’ revenue per funded account decreased from R368 per account in 2020 to R222 per account in 2022.
Over the last financial year, EasyEquities’ revenue per funded account has declined to its lowest level since launch.
EasyEquities growth slowing and costs increasing
The data shows that EasyEquities is experiencing a slowdown in growth and becoming less efficient with each additional registered funded account.
It raises doubt about the assumption that the historical performance of R200 profit per account will continue to hold in the future.
The data shows that the growing EasyEquities customer base deposits less per year as time progresses, reducing the revenue per account.
Savage explained that the average age of investors that currently join EasyEquities is still very young and that their income level would increase as they get older.
It could be a valid explanation for the decrease in deposits made. However, it creates a more fuzzy view of the numbers.
Another risk to EasyEquities is that it can reach a plateau because South Africa does not have a large and growing number of employed individuals.
To address this problem, EasyEquities plans to launch in the Philippines to expand its footprint and prevent growth stagnation.
The charts below show EasyEquities’ financial performance over the last few years.