Hargreaves Lansdown (LSE:HL) shares are well represented in my portfolio. In fact, it’s also my personal pick of investment platforms.
But the share price has suffered over the past two years — since the height of the pandemic. And it current trades around 15 times earnings. I don’t believe that’s particularly high, especially taking into account the company’s long-term growth prospects.
So, let’s take a closer look at this stock and explore why I think it could be undervalued.
More downward pressure
If I had bought £500 of Hargreaves Lansdown shares a year ago, today I’d have around £380 plus around £20 in dividends. That’s clearly a pretty poor return on my investment.
The stock has pushed upwards on a couple of occasions, but over the course of the year the stock is down 24%.
This is largely because the environment for private investors has deteriorated. We have a cost-of-living crisis and the stock market has demonstrated considerable volatility. Combined with the reopening of the economy post-Covid, Hargreaves has struggled to maintain its pandemic-era growth.
Bulls vs bears
Okay, well let’s start by looking at the main concerns some investors have about Hargreaves. Firstly, there doubts about the long-term viability of the company’s fee-based revenue streams.
That’s because some investment platforms have started reducing their transaction fees and could undercut Hargreaves — the UK’s top investment platform.
In fact, over in the US, Charles Schwab — a brokerage — has reduced commissions to zero. However, at this moment, transaction fees only account for a small part of the Hargreaves’s overall revenue generation.
Ongoing revenue — generating over 80% of total revenue — is primarily comprised of platform fees on funds and equities, fund management fees, net interest income and ongoing advisory fees.
As we can see, transactional stockbroking commission is not a huge part of the business. It’s perhaps something that could be foregone in the future in order to attract more clients.
I’d also argue that platform fees really aren’t enough to deter customers. This is 0.45% for a Stocks and Shares ISA (capped at £45 a year), 0.45% for a Self-Invested Personal Pension (capped at £200 per year), 0.25% for a Lifetime ISA (capped at £45 per year). As of March, there are no fees on Junior ISAs.
Interested in interest
What I do find particularly intriguing is the company’s ability to earn interest on customer deposits. With interest rates at their highest since 2008, and forecasts for a medium-term sweet spot of 2%-3%, Hargreaves could really prosper here. Net interest income could be worth over £200m to Hargreaves this year.
Investors may also worry about the firm’s ability to attract new customers going forward. Net new clients fell to 31,000 in the first half (to Dec 31). However, I believe the Bristol-based firm is well positioned to benefit from a trend of Britons looking to take control of their investments.
So, when it comes to Hargreaves Lansdown, I’m most definitely a bull. And with a dividend yield of 5%, it’s an attractive addition to a passive income portfolio. That’s why I’m buying more.
