The wisdom on WisdomTree Investments Inc. (WETF, Financial) is in, and the outlook is not great. What was once a pretty solid value fincom stock is far past its prime. The company is hemorrhaging money and customers. Investors might be wise to steer clear of this former financial darling.
What happened to the success story?
WisdomTree has faced significant financial trouble of late, declining rapidly over the last several years. It has fallen from $25 per share to barely above $11 now. This is somewhat surprising given the broad success of exchange-traded funds.
The ETF market was at first quite niche. WisdomTree largely benefited from this fact, particularly in 2013 and 2014. However, that market is now increasingly saturated. WisdomTree looks unable to continue to hold its own and management seems unable to stop the company from floundering.
We see management, competition and, most significantly, a massive decrease in pricing leverage as the reasons for WisdomTree’s struggles. We do not see these dissipating enough to make this stock worthwhile.
The financial story doesn’t pass the smell test
WisdomTree is a financial Titanic, and it is taking on water fast.
Revenue has precipitously declined from $299 million in 2015 to $237 million in 2017. That is a more than 25% drop in just two years. With plenty of other companies with increasingly promising growth, why place your money on WisdomTree?
Even while revenue has decreased, selling, general and administrative expenses have increased every single year, leading to a significant decline in operating income. Without any increased revenue, increasing costs threaten to cripple the business.
Profitability is suffering. Net income has dropped by more than two-thirds, from $80 million just two years ago to $27 million this year. That is a worrying sign for WisdomTree. Similar decreases moving forward could eliminate the company’s profitability altogether.
WisdomTree further fails my favorite test of all: the muster of its earnings per share results and surprises. While the company surprised by 29% back in second-quarter 2017, they have hit or missed earnings per share targets in the last three quarters, including a very big miss at the end of 2017. Earnings per share results are also markedly anemic. For a company that has been around for over a decade with $40 billion in assets under management, such financial results are troubling.
Three problems spring to the forefront
Falling customer base. With a falling customer base, WisdomTree is losing potential revenue from existing clients. Without a robust program for attracting new clients – and keeping old ones – WisdomTree has no hope of regaining any semblance of its past successes. This is all on management; it is their great task moving forward. Are they up to the task? We aren’t so sure.
Competition. Further, competition is squeezing WisdomTree. The company now faces intense competition from giants like BlackRock, State Street and Vanguard. These investment giants have realized the value of ETFs and are now actively challenging WisdomTree in the market.
ETFs are an increasingly attractive business and investors across their globe are flooding the market with cash. You would think such a reality might be good for WisdomTree and its chances of success. However, the exact opposite has happened. More money and focus on ETFs has resulted in more and more entrants into the market, and this has stolen much of what was once WisdomTree’s large share of a formerly niche pie. Everyone has now made it to the table.
Pricing issues. Hand-in-hand with increased competition comes pricing issues. Before, WisdomTree could price the ETFs however they liked and take basically whatever cut they wanted from their participants. Now, that reality looks much more grim for the company. They are highly constrained by competitors.
Verdict
Can WisdomTree turn things around? Sure. They can attract new clients, increase their takes on investments and turn around failing leadership. However, we don’t feel the need to stick around and see.
But WisdomTree has seen a significant decline over the last several years, losing shareholders a very large chunk of cash. The stock is down more than 100% in two years. Time to pull anything you might have in out before you lose even more.
One day, perhaps, the stock will drop enough to be a value again. Alas, today is not that day.
Disclosure: I/We own no stocks discussed in this article.
(This article was co-authored by Clyde William Engle Jr., an analyst with Almington Capital – Merchant Bankers.)
