The Hargreaves Lansdown (LSE: HL) share price slumped by over 20% in early deals this morning after the company published figures for the six months ended 31 December 2021.
On a headline basis, the numbers were pretty disappointing. Profit before tax fell 20% year-on-year to £151m. Revenue fell 3% overall, and the total volume of net new business declined 28% compared to the prior period.
However, total assets under administration increased 17% to £141bn. The company also outlined plans to spend £175m over the next five years to build a presence in the wealth management market.
Management also anticipates overall group costs to increase by a double-digit percentage in 2022 before falling back to less than 10% per annum over the next couple of years.
Hargreaves Lansdown share price slump
Clearly, these numbers have spooked the market. Hargreaves Lansdown’s profits are under pressure. With costs set to increase dramatically over the next couple of years, this weight on the company’s bottom line will persist.
Still, I think these numbers need to be viewed with a long-term lens.
The second half of 2020 was a bumper year for the company. Therefore, the numbers for the second half of 2021 were always going to look bad by comparison. This explains some of the decline in profitability.
The good news is, it seems as if the investors who moved to the business over the past 24 months have stayed. With total assets under administration up 17% year-on-year, these new investors seem to believe Hargreaves Lansdown provides an excellent service. Unfortunately, it looks as if these new investors are not trading as much.
What’s more, while the market might be disappointed by the firm’s decision to spend £175m expanding into wealth management, this could be a huge opportunity. The wealth management business in the UK is massive, and it is expanding. Many services offered charge high fees, but investors lack the choice to go elsewhere. Hargreaves Lansdown has the potential to shake up the sector, just as it did with the online stockbroking market.
That said, this move into the wealth management market could end up being a costly mistake. The market is competitive, and acquiring customers will be expensive. If competitors lower costs to try and push the business out, it could start a vicious price war. In this case, the firm may have to invest more for longer.
Attractive valuation
Despite this risk, I think the firm is making the right decision in the long run. As such, I believe today’s decline in the Hargreaves Lansdown share price presents an opportunity.
Indeed, after this morning’s slump, the stock has fallen to a forward price-to-earnings (P/E) multiple of 24, below the five-year average of 30. The stock also offers a dividend yield of 3.3%, at the time of writing.
I think the Hargreaves Lansdown share price is deeply undervalued based on these metrics. That is why I would buy the stock for my portfolio today.
