eToro: A Successful Debut For This Crypto/Broker Play

Summary eToro’s IPO saw shares surge nearly 30% on the offering day, but I have significant concerns about the sustainability of its business model. The company is heavily reliant on volatile crypto revenues, which introduces principal risk and differentiates it unfavorably from traditional brokers. Despite strong user growth and a sizable cash position, earnings are highly volatile and limited relative to the current valuation. Given the risks, competition, and questionable earnings power, I am cautious and will not invest, despite the impressive debut. Shares of eToro Group ( ETOR ) have seen a strong public debut, as the online broker saw shares rise by nearly 30% to $67 per share on the first day of trading. While growth and excitement around crypto might drive these returns, I have real concerns about the business model after a look under the hood. While this might have to do with my own conservative thoughts, I am happy to pass on this opportunity. Trading Platform eToro has a vision to open global markets for everyone to trade and invest in both a simple and transparent way. The company was founded back in 2007 on the back of this idea, with markets at the time still dominated by traditional financial institutions which focused on investors with a substantial capital base. Besides simplicity, the company has been focuses on the power of technology, fostering a culture of sharing, innovation and adoption of cryptocurrencies in its offerings. With the passage of time, the company has grown to a base of 3.5 million funded accounts as of year-end 2024, with customers located across 75 countries. The company has been benefiting from the rise of popularity of (crypto) investing and the focus on younger age cohorts which appreciate the learning and collaboration services offered as well. These users have a total of $16.6 billion of assets under administration with average balances coming in at $47k, with typical trades averaging in the hundreds of dollars, both applying to equity trading and crypto trading. Valuation and IPO Thoughts eToro initially aimed to sell 10 million shares at a preliminary price range between $46 and $50 per share, with the share sale split evenly between shares offered by the company and those offered by selling shareholders. Strong demand made that the offer was priced at $52 per share, with the offering upsized to 12 million shares being sold. With nearly 83 million shares outstanding post the public offering, equity of the business was valued at $4.3 billion at the offer levels. Given the rise to $67 per share on the first day of trading, this market value has risen by over a billion to $5.6 billion. Pro forma cash and equivalents stand at $878 million with liabilities reported at $358 million, for a net cash position of roughly half a billion, implying that operating assets are valued at around $5 billion. If we look at the results, we see the complications in the business model. Total revenues were reported at $6.3 billion, $3.9 billion and $12.6 billion, respectively in the year 2022/2023 and 2024. The vast majority of these sales (typically around 90%, or more) has been derived from revenue from crypto assets, with the company reporting trading profits and losses on this category as well. On the bottom line, an operating loss of $215 million was reported in 2022, followed by a $28 million gain in 2023 and $245 million gain in 2024. While these are large numbers, they are tiny in relation to revenues, but moreover highly volatile and reliant on crypto. Moreover, it is not just reliance on crypto volumes, but also pricing risks, which differentiate eToro from other brokers (as the company also reports inventories on the balance sheet) which is not appealing in my view, to put it mildly. Looking at the preliminary first quarter results for 2025, the company sees the number of accounts rise to nearly 3.6 million, yet adjusted EBITDA for the quarter is seen down slightly from the first quarter of 2024, which was relatively strong in all fairness. In either case, results are very volatile and hard to read into, with volatility largely used by net revenues from crypto assets, complemented by more stable trading income from and equity and other asset classes, net interest income and currency conversion & other income. Concluding Thoughts I have real concerns and questions on the IPO of eToro and its business. Results, including sales and earnings, are very volatile and comprised largely out of net crypto revenues, which are not just very volatile but involve principal risk to the business as well (unlike the true definition of a broker). Given this, there are many risks, including volatility in prices and activity levels, stiff competition, real risks which not only include regular business risks, but also that of cybersecurity, theft, reputation risks, compliance, and others. With earnings power looking to be relatively limited in relation to the current valuation, and me having real concerns on the business and sustainability of the business model, I am erring cautious here. As a result, I refrain from investing, more driven by concerns on business (model) rather than the valuation (which looks high as well) although that my conservative thought could easily be proven wrong. After all, somewhat related and similar platforms like Robin Hood ( HOOD ) and Coinbase ( COIN ) have seen success as well. Given all this, I am erring on the cautious side, not having an interest in getting here, despite and inspire the very successful public debut made by the business.

Source: Seeking Alpha