Elevator Pitch
I have a Hold rating for Forge Global Holdings, Inc. (NYSE:FRGE) shares.
I previously wrote about FRGE’s short-term financial outlook and the long term prospects for its data business with my March 6, 2023 initiation article.
The focus of the current article is Forge Global’s share price underperformance following its recent Q1 2023 results announcement, and my preview of FRGE’s Q2 2023 financial performance (currently expected August 8). Based on my analysis, FRGE’s recent share price correction is justified based on the company’s first quarter revenue mix. Looking forward, I don’t expect Q2 2023 to throw up any positive surprises. In the absence of significant short-term catalysts, a Hold rating for Forge Global is fair in my opinion.
FRGE Shares Have Fallen Significantly Since The First Quarter Results Release
Forge Global’s stock price dropped by -24.0% in two weeks after it reported its Q1 2023 financial results on May 9 after the market closed. Even though FRGE’s first quarter bottom line turned out to be better that what the Wall Street analysts had anticipated earlier, this wasn’t a high quality earnings beat, which is reflected in Forge Global’s poor post-results price performance.
Net loss per share for Forge Global narrowed from -$0.15 in the fourth quarter of last year to -$0.12 for the most recent quarter, and FRGE’s Q1 2023 bottom line wasn’t as bad as the sell-side’s consensus net loss projection of -$0.14 per share. Forge Global had put in place cost control initiatives, which have paid off. At the company’s Q1 2023 results briefing, FRGE disclosed that its staff strength was reduced from 357 as of end-Q3 2022 and 349 as of December 31, 2022 to 339 at the end of March this year. As a reference, staff-related expenses account for around 70% of Forge Global’s operating costs.
The company’s revenue decreased by -23% YoY and -8% QoQ to $15.5 million in the first quarter of the current year. In fact, Forge Global’s actual Q1 2023 top line came in -11% below the market’s consensus sales estimate of $17.4 million. FRGE’s trading volume, the key metric which affects its revenue, fell by -48% QoQ in the recent quarter, which the company attributed to “continued uncertainty of market participants about the economic outlook and the health of the banking industry” at its Q1 results call.
FRGE achieved a low quality bottom line beat for Q1 2023, as its narrower than expected net loss in the recent quarter was driven by expense optimization rather than top line expansion. This explains why Forge Global’s share price has headed southwards despite delivering an above expectations bottom line for Q1 2023.
I Anticipate That Q2 2023 Will Be A Mixed Quarter For Forge Global
FRGE is expected to announce its financial performance for the second quarter in early August.
My view is that Forge Global’s prospects for Q2 2023 will be mixed. Specifically, I predict that FRGE’s top line will grow on a QoQ in the second quarter, but I see the company’s net loss widening during the same time period.
There are multiple indicators pointing to a potential trade volume and revenue recovery for Forge Global in Q2 2023.
Firstly, the banking crisis had a significant negative impact on FRGE’s trade volume and top line in Q1 2023, and this shouldn’t be the case for Q2 2023. UBS Group AG’s (UBS) recent April 2023 research commentary on private markets highlighted that “banking sector stress eased in April from heightened levels in March,” after “regulators appear to have stabilized the banking system.” Therefore, it is reasonable to expect a rebound in trade volume and revenue for Forge Global in the current quarter.
Secondly, Forge Global’s recent May 2023 research update noted that there were signs of improvement for private market valuations. FRGE’s research found that April 2023 marked the first month in this year that private “companies in the 90th percentile and above of price premiums versus last funding rounds” were valued at a premium; private companies in this category were valued at below their respective “primary fundraising valuation” between January 2023 and March 2023.
Thirdly, FRGE shared its observations at the Q1 2023 earnings call that “the rate at which companies are exercising the right of first refusal to buy back shares” rose to a two-year peak in the recent quarter. This serves as a sign that an increasing number of private businesses hold the view that private market valuations have already troughed.
On the other hand, I am of the opinion that Forge Global’s profitability improvement for Q1 2023 is unsustainable.
FRGE responded that its “goal” is “to maintain our overall headcount flat,” when asked a question about the outlook for its staff strength at the most recent quarterly results briefing. As mentioned earlier in this article, FRGE’s number of employees has decreased in two consecutive quarters, Q4 2022 and Q1 2023. As per Forge Global’s management commentary, I think there is a low probability of a meaningful cut in headcount for Q2 2023 and beyond.
Separately, I alluded to the huge potential for Forge Global to grow its top line contribution from data subscription fee revenue in my early March write-up for FRGE. However, the future growth in data subscription fees for FRGE has to come at the expense of higher costs incurred in the near term. Forge Global stressed at its first quarter earnings briefing that “in terms of future investments, we’re really focused on data.”
Therefore, it will be unrealistic to expect Forge Global to deliver narrower losses or a significant improvement in its bottom line for the upcoming quarter.
Concluding Thoughts
Forge Global Holdings, Inc. trades at an undemanding consensus forward next twelve months’ Enterprise Value-to-Revenue multiple of just 0.42 times as per S&P Capital IQ’s valuation data. But my preview of Forge Global’s upcoming quarterly results suggests that its Q2 2023 results are unlikely to offer positive surprises which can act as catalysts for the stock. As such, I have chosen to leave my Hold rating for Forge Global Holdings, Inc. unchanged.
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