Wealthfront (NASDAQ: WLTH) recently issued new shares in an initial public offering, which received a tepid response from investors; the stock trended slightly down in its first week of trading. We are particularly interested in this opportunity for the company and its stock, given its strong underlying business: Wealthfront serves over 1.3 million clients, manages approximately $90 billion in assets, and generated around $339 million in revenue, up 26% year-over-year in the last twelve months and mid 40s adjusted EBITDA. The IPO was led by Goldman Sachs and J.P. Morgan, amid what some view as an increasingly competitive wealth-tech sector. That said, our view is that being first to market is not always the same as being the best positioned for long-term success.
Let us explain.
Wealthfront provides an entirely digital platform that focuses on automation, low fees, and the integration of both banking and investment services. The company does not charge transaction fees or commissions for buying or selling investments in its automated investing accounts, stock investing accounts, or other portfolios, as it operates on a low-fee model with annual advisory fees ranging from 0.09% to 0.25% depending on the portfolio type. Despite its streamlined approach, Wealthfront delivers a comprehensive range of automated investment management services guided by Modern Portfolio Theory which results in a curated solution. Using sophisticated technology built up over a decade of experience, it manages portfolios through proprietary algorithms. The service is primarily designed for young professionals, tech-savvy investors, and those who prefer a passive investing style.
The company is designed to serve millennials, Gen Z, and digital natives with the mission to build a personalized financial platform that emphasizes automation and low costs. The company was founded by Andy Rachleff (co-founder of Benchmark Capital) and Dan Carroll (Factset), has grown through several versions of itself and pioneered automated, software-driven investing to democratize access to sophisticated financial advice.
Stock market jitters.
During periods of market volatility and transition from investor optimism to economic caution, many IPOs may exhibit neutral or declining short-term trading trends. Within this context, WLTH shares face the additional challenge of generating revenues from the stock market, in the parlance of risk management could be labeled “double jeopardy.” Typically, during periods of investor uncertainty, businesses linked to the stock market do not outperform the relevant indexes and may be subject to “negative leverage.” Conversely, these businesses tend to perform better during broadly recognized bull markets.
How big is the addressable market?
Below we have summarized the addressable market discussion from the company’s prospectus (which we encourage investors to read). Digital natives, defined as individuals born after 1980, represent approximately 190 million people in the United States according to 2023 Census data. Currently in their prime wealth accumulation years, this group is projected to become the most affluent generation to date, with overall assets expected to increase from $12 trillion in 2022 to $140 trillion by 2045. A significant portion of this wealth will be concentrated among high-earning knowledge workers and net savers, driven primarily by career earnings growth. Federal Reserve statistics show median household net worth rising from $39,000 for those under 35, to $135,600 for those aged 35-44, and reaching $365,000 for ages 55-64 in 2022. Technology-based platforms are well positioned to harness this trend. By targeting digital natives, there is access to a $16 trillion market in 2024, equating to 10% of U.S. household wealth. The serviceable segment, high earners in the top 20%, whose share of wealth has increased from 60% in 1989 to over 70% since 2014, is estimated at more than $11 trillion.
Is Wealthfront ready to perform as a public company?Wealthfront has spent nearly twenty years as a private company, fine-tuning its business model and achieving solid internal growth. The company secured $270 million in private investments from prominent firms such as Tiger Global, Benchmark Capital, Greylock Partners, and Index Ventures, among others. In our opinion, Wealthfront has had ample time, expertise, and resources to develop a cutting-edge wealth management platform. Short-term fluctuations in the stock market cannot undo the demographic trends discussed earlier.
