eToro Earnings: The Good, The Bad, And The Ugly (Rating Downgrade)

Summary Downgrading eToro stock to ‘hold’ due to concerning Q1 20225 signals, especially negative gross margins in the core cryptoasset business. Revenue grew 11% year-over-year, with diversification beyond cryptoassets and strong growth in funded accounts and interest-earning assets. Despite top-line growth, eToro’s net income declined 6.5% year-over-year, driven by surging marketing and SG&A expenses. ETOR remains less overvalued than peers, but I need to see another quarter of results before considering an upgrade from ‘hold.’ eToro Group Overview Less than a month ago, I initiated coverage of eToro Group Limited (NASDAQ: ETOR ) for Seeking Alpha prior to the company’s IPO. While I rated the stock a ‘buy’ based on encouraging trends from the company’s 2024 performance and relative valuation to peers, I cited eToro’s reliance on a volatile asset class as a risk to the company’s top and bottom lines: We’ve seen how volatile eToro’s top line has been over these last three years and the reliance on digital assets for top and bottom line performance figures to continue given the consumer cohort that eToro appeals to. I was willing to overlook that volatility given some of the positive indications from eToro’s cryptoasset business in 2024. However, that story is not present so far in 2025. While I do see some positive signs from eToro’s Q1 2025 earnings report , given what I view to be some fairly bad signals beneath the surface, I’m downgrading the stock to a ‘hold.’ Let’s dive into what I view to be the good, bad, and ugly from eToro’s first quarterly earnings report as a public company. The Good Starting with the good news; eToro grew top line revenue 11% year over year from $3.4 billion to $3.8 billion in the quarter ended March. For ease of reading, I’ve consolidated several of eToro’s dis-aggregated revenue segments into ‘other’ in the table below: Revenue and income: Q1-25 Q1-24 YoY Net trading income from equities, commodities and currencies $96,837 $73,098 32.48% Revenue from cryptoassets $3,500,800 $3,293,120 6.31% Other (interest, currency conversion, trading, derivatives) $157,744 $17,302 811.71% Total revenue and income $3,755,381 $3,383,520 10.99% Percent of Revenue from Crypto 93.22% 97.33% -4.22% Source: eToro, Form 6-K, dollars in 000s In my pre-IPO coverage, I noted that eToro’s percentage of top line revenue from its cryptoasset business in 2024 was higher than both the prior two years having jumped from 88.3% to over 96%. At just 93.2% of total revenue from cryptoassets in Q1, it’s good to see some of the other revenue segments outpacing cryptoasset revenue growth. The latter of which grew just 6.3% from the prior year period while income from equities, commodities and currencies grew by over 32% – albeit from a substantially lower starting value. The ‘other’ category looks highly impressive but I should mention that it is skewed by a $56.8 million loss from cryptoasset derivatives trading in Q1-24. If we take that segment out of the ‘other’ category, YoY growth from interest income and currency conversion came in at 9%. There are additional positive takeaways that I’d be remiss if I did not mention before we get into the bad. For instance, eToro grew funded accounts by 14% year over year to 3.6 million. Though this was aided by an acquisition of an Australian investing app rather than totally organic. Commissions from trading equities grew both year over year and sequentially. Finally, interest earning assets grew 28% to $6.4 billion. The Bad While top line numbers grew, the bottom line did not. Costs Q1-25 Q1-24 YoY Cost of revenue from cryptoassets $3,528,853 $3,173,766 11.19% Margin interest expense $9,159 $8,650 5.88% Research and development $36,621 $33,166 10.42% SG&A $110,724 $93,384 18.57% Total costs $3,684,840 $3,309,894 11.33% Income (loss) before taxes on income $70,541 $73,626 -4.19% Taxes on income $10,589 $9,516 11.28% Net income (loss) $59,952 $64,110 -6.49% Source: eToro, Form 6-K, dollars in 000s Cost of revenue from cryptoassets rose over 11% from $3.2 billion in Q1-24 to over $3.5 billion in Q1-25. This was inline with the 11.3% growth in total costs – but that’s really only due to the fact that revenue and cost of revenue from cryptoassets make up such a substantial percentage of eToro’s business. Income before taxes and net income both fell year over year by 4.2% and 6.5% respectively. The reason for the decline in net income from eToro’s earnings release was due to an increase in marketing and growth. To be sure, selling and marketing expenses did indeed balloon 64% year over year from $37.3 million to $61.2 million last quarter. All told, SG&A grew by 18.6% over the prior year period in Q1. The company justified the surge in marketing expenses in Q1 because of “favorable market conditions.” But I’m not so convinced. The Ugly The elephant in the room from this report is the un-profitability of eToro’s cryptoasset business in the quarter: eToro Cryptoasset Business Q1-25 Q1-24 YoY Revenue from cryptoassets $3,500,800 $3,293,120 6.31% Cost of revenue from cryptoassets $3,528,853 $3,173,766 11.19% Gross Margin From Crypto -0.80% 3.62% Source: eToro, Form 6-K, dollars in 000s One of the biggest reasons why I called eToro a speculative buy last month was due to the company’s cryptoasset business generating a gross margin that was substantially better than that of Coinbase ( COIN ) in both 2023 and 2024. However, we now see a company that is still quite reliant on cryptoassets for top line revenue but one that has flipped from positive to negative gross margins in the segment. That’s not bad, that’s ugly. Closing Takeaways Data by YCharts I’m certainly not the only one who didn’t care for some of the signals in this report. After closing at just under $76 per share on Monday June 9th, ETOR was walloped 12% on June 10th in response to Q1 earnings. The company still isn’t as overvalued as crypto peers like COIN or Robinhood ( HOOD ) on a forward earnings multiple. But I certainly wouldn’t venture to call ETOR ‘cheap’ either. I’ll attempt to end on a brighter note; it is well within the realm of possibility that Q1-25 is simply a relatively poor quarter within a broader trend of positive growth for eToro. I’d rather not bank on that at $66 per share before seeing another quarter of performance data. I’m downgrading ETOR to ‘hold’ for now.

Source: Seeking Alpha