The Hargreaves Lansdown (LSE:HL.) share price fell below £10 in April 2022 — a level the stock traded above for most of the past decade. To the dismay of investors in the FTSE 100 brokerage firm, the downtrend has continued. Today, Hargreaves Lansdown shares are changing hands for just £7.64 each.
So, why has the direct-to-investor service provider struggled? Can it recover? And is the company undervalued today?
Here’s my take.
Share price slump
Not so long ago, Hargreaves Lansdown shareholders would have been popping champagne corks. Back in May 2019, the stock was making new all-time highs above £24. Since then, the shares have lost more than two-thirds of their value.
There are various reasons behind the company’s fall from grace. The first key turning point was the implosion of Neil Woodford’s equity income fund in October 2019.
Following the fund’s liquidation, Hargreaves Lansdown has been grappling with a multi-million pound lawsuit. The brokerage is alleged to have recommended Woodford’s product to investors, despite knowing about the liquidity issues it faced. The ongoing litigation adds uncertainty to the outlook for Hargreaves Lansdown shares.
To compound its difficulties, stock trading activity has fallen after a short-lived boom during the pandemic. In turn, Hargreaves Lansdown’s profits have been squeezed as the cost-of-living crisis weighs on the retail investor market.
Turnaround prospects
On the face of it, Hargreaves Lansdown has a mountain to climb. Regaining investor confidence is never an easy feat. That said, there are some glimmers of hope in the company’s latest trading update.
In Q4 2023, the firm won £1.7bn in net new business — up 6% on the previous quarter. In addition, the group’s assets under administration expanded 2% to £134bn and net client growth of 13,000 took the company’s total number of clients above 1.8m.
Plus, investors shouldn’t forget the passive income potential of Hargreaves Lansdown shares. The stock currently offers a 5.2% dividend yield, which comfortable beats the average across FTSE 100 shares. Covered 1.6 times by forecast earnings, there isn’t a wide margin of safety, but the payouts don’t look unsustainable at present.
Competition
Hargreaves Lansdown claims 42% of the direct-to-consumer market. This is evidence of the brokerage’s brand strength and strong offering. These qualities equip the company with a number of strategic advantages. However, this is a highly competitive space.
New direct-to-consumer platforms are coming to market on a regular basis and Hargreaves Lansdown faces a tough fight to retain market share. Recent price reductions on its LISA and JISA accounts, coupled with the removal of fees for dividend reinvestments and regular monthly investing, should help in this regard. But, investors should monitor whether this has an adverse impact on profits going forwards.
A rare chance to buy cheap shares?
Currently, Hargreaves Lansdown shares have a forward price-to-earnings (P/E) ratio of around 12.6 based on the consensus forecast. That’s substantially lower than the stock’s multiple in previous years. Plus there’s a solid dividend on top.
However, the scandal-hit company still has a long way to go before it returns to full strength. Overall, if I had spare cash, I’d be happy to invest a small amount today. I think there’s an opportunity here — but there are plenty of risks too.
