FXCM Inc (NYSE:FXCM) is one of the biggest exclusively-online foreign exchange trading platforms on the market, supporting transactions worth $1.8 trillion in the third quarter. Trading activity is the foundation of this business, and the most recent numbers show turnover on the platform up by a healthy 20% over last year. What now looks like a brief stumble earlier in the year makes this company interesting as a growth prospect.
While the Nov. 6 earnings proved that FXCM has returned to profitability, it is still early in the recovery cycle. The next numbers three months from now will be important because they will show traders whether or not the business has achieved critical mass in terms of efficiencies of scale.
Although Wall Street thinks trading activity is only expanding at a rate of 16% in the current quarter, that top-line growth may translate into a much more robust 68% earnings growth by the time FXCM reports its results in early February. If the company can hit that seemingly high bar, the runway is clear for triple-digit growth for much of 2015.
That implied growth rate means this company can become extraordinarily attractive to investors in a very short period of time. Even now, the growth opportunity here supports a superficially rich P/E of 63X trailing earnings, but factoring in consensus numbers for the next 12 months would significantly lower that, leaving FXCM trading at a P/E of just 9X this time next year.
Better established brokerage platforms trade comfortably at a P/E of around 14.5X, so FXCM might ultimately appreciate to $26.50 or even $27 if its reach continues to expand the way the analysts think.
In the here and now, the stock bounced at the end of October and has consolidated around $16.50. The chart is open to recapture the $17.50 to $18 levels FXCM commanded before the earnings trend faltered. Beyond that, this stock has the potential to give investors truly spectacular performance as long as trading activity holds up.
I also like that the bulk of FXCM’s business is now institutional in orientation, which means the company is not as vulnerable as it was to fluctuations in retail investors’ loyalties. Institutional clients are stickier by definition: once they sign onto a brokerage platform, they are slow to leave or even change their trading habits.
With that in mind, I expect FXCM to keep growing, and that growth should drive the stock higher in the near future.