Elevator Pitch
My investment rating for Forge Global Holdings, Inc. (NYSE:FRGE) stock stays as a Hold.
In my prior May 22, 2023 update, I outlined my expectations of FRGE reporting “higher revenue and wider losses” in Q2 2023. With this current article, I review Forge Global’s actual second quarter financial results.
FRGE’s recent quarterly bottom line was worse than what Wall Street had anticipated. On the flip side, Forge Global’s 2H 2023 prospects are favorable. However, positives are priced in for FRGE, judging by the company’s recent share price performance and positive valuation re-rating. Taking into account the factors mentioned above, I have decided to stick with my existing Hold rating for FRGE.
FRGE’s Q2 Top Line Was In Line With Expectations
Forge Global issued a media release on Tuesday, August 8, 2023 after trading hours revealing the company’s financial performance for the second quarter of the year.
Revenue for FRGE increased by +8% QoQ and +1% YoY to $16.7 million in Q2 2023, and Forge Global’s top line turned out to be just -0.6% lower than the market’s consensus sales projection of $16.8 million (source: S&P Capital IQ). In other words, Forge Global’s actual second quarter revenue met the sell-side’s expectations.
FRGE’s custodial administration fees expanded slightly by +1% QoQ from $10.9 million in the first quarter of the current year to $11.0 million for the recent quarter. In comparison, Forge Global saw its placement fees grow by +24% QoQ to $5.7 million in Q2 2023, which was the main driver of the company’s top line expansion for the second quarter of the current year. It is worthy of note that this is the first time in the past six quarters that FRGE has managed to increase its placement fees on a QoQ basis.
Forge Global highlighted at its Q2 2023 results call that the higher placement fees for the quarter were attributable to “improving market conditions.”
Second Quarter Losses For Forge Global Were Worse Than Expected
In contrast with the company’s in-line Q2 revenue, FRGE’s losses in the most recent quarter were much more significant than what the analysts had initially forecasted.
Forge Global’s Q2 2023 net loss per share and normalized EBITDA loss were -$0.14 and -$11.8 million, respectively. As per S&P Capital IQ’s consensus data, Wall Street was expecting narrower net loss and normalized EBITDA loss of -$0.11 and -$11.1 million, respectively for the company in Q2.
Net loss for the company widened from -$0.12 in Q1 2023 to -$0.14 for Q2 2023 due to a +67% QoQ jump in non-cash costs. These non-cash items which hurt FRGE’s bottom line included “share-based compensation” and “unfavorable changes in the fair value of warrant liabilities and an increase in contingent current liabilities”, as indicated in Forge Global’s Q2 earnings release.
FRGE’s actual second quarter non-GAAP adjusted EBITDA loss (-$11.8 million) was larger than the market’s consensus estimate (-$11.1 million). At the company’s second quarter results briefing, Forge Global stressed that it is “continuing to try to find that balance between managing our costs carefully, reducing our burn, but also investing for the future.” This might help to explain why the company’s wasn’t able to reduce its operating expenses on a QoQ basis. Specifically, Forge Global’s operating costs still increased by +2% from $38.4 million for Q1 2023 to $39.2 million in Q2 2023, which led to the company’s EBITDA miss for the recent quarter.
Market Has Priced In FRGE’s Positive Outlook
Notwithstanding FRGE’s Q2 2023 bottom line miss, Forge Global has witnessed substantial share price appreciation and valuation multiple expansion since the start of the year.
FRGE’s stock price surged by +67% in this year thus far, and its consensus forward next twelve months’ price-to-revenue multiple has re-rated from 3.5 times at the start of 2023 to 6.1 times (source: S&P Capital IQ) as of August 8, 2023.
It seems like Forge Global’s stock price performance and valuation multiple have already factored in the potential 2H 2023 recovery for the company.
Based on the sell-side analysts’ consensus financial figures sourced from S&P Capital IQ, FRGE’s top line is projected to expand by +20% YoY and +25% YoY to $19.1 million and $21.0 million for the third quarter and fourth quarter of this year, respectively. The market consensus also sees Forge Global’s net loss per share narrowing from -$0.14 for Q2 2023 to -$0.11 and -$0.10 in Q3 2023 and Q4 2023, respectively.
There are key metrics disclosed as part of Forge Global’s Q2 2023 results, which provide support for the company’s favorable 2H 2023 outlook. FRGE disclosed at its Q2 results call that “the number of issues we transacted in was up by 25%” on a sequential basis in the second quarter. Forge Global also noted in its Q2 2023 results press release that the number of trades executed by FRGE jumped by +46% QoQ to 306 in the first quarter of this year to 448 for the most recent quarter. As such, the positive growth momentum for Forge Global in Q2 2023 (as evidenced by metrics presented above) should be sustained for the rest of the year.
Closing Thoughts
Forge Global’s recent second quarter net loss was wider than what the sell-side anticipated, but there are expectations of an improvement in the company’s financial performance for the second half of the year. Nevertheless, positives have been priced in for FRGE, which suggests that a Hold rating for Forge Global is fair.
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