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Hargreaves Lansdown plc

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Hargreaves Lansdown plc is a financial services company based in Bristol, United Kingdom. It was founded in 1981 by Peter Hargreaves and Stephen Lansdown. The company provides investment and financial services including investment advice, stockbroking, wealth management, and savings products.

Hargreaves Lansdown serves both individual investors and corporate clients, offering a range of solutions such as Individual Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs), and Fund & Share Accounts. The company operates mainly through its online platform and has grown to become one of the largest direct-to-consumer investment services in the UK.

OperationsEdit

How did the idea of the company come about?Edit

Hargreaves Lansdown was founded in 1981 in Bristol by Peter Hargreaves and Stephen Lansdown. The idea came about to provide financial advisory services and investment management to retail investors, focusing on offering cost-effective and user-friendly platforms.

What's the mission?Edit

Hargreaves Lansdown's mission is to empower people to save and invest with confidence, providing them with the tools, information, and support needed to achieve financial security and peace of mind.

What are the main offerings of the company?Edit

  1. Investment Accounts: ISAs, SIPPs, and general investment accounts.
  2. Financial Advisory Services.
  3. Wealth Management and Portfolio Management.
  4. Share Dealing and Trading Platforms.
  5. Research and Analysis Tools.

What's the current strategy of the company?Edit

The current strategy of Hargreaves Lansdown focuses on enhancing the customer experience through digital innovation, expanding the range of investment solutions, and maintaining strong compliance with regulatory standards to foster trust and growth in client relationships.

Who are the main team members?Edit

Chris Hill - Chief Executive Officer (CEO).

Philip Johnson - Chief Financial Officer (CFO).

John Troiano - Chairman.

Stephen Lansdown - Co-founder.

Pete Hargreaves - Co-founder.

MarketEdit

Hargreaves Lansdown plc operates primarily in the financial services market. The company addresses various segments including:

  1. Retail Investment Services: Offering investment management and portfolio management services for individual investors.
  2. Advisory Services: Providing financial advice and wealth planning solutions.
  3. Pension Services: Offering Self-Invested Personal Pensions (SIPPs) and other retirement planning products.
  4. Stockbroking: Facilitating share dealing and other trading activities.

The company primarily focuses on serving individual investors in the UK, but it also has a growing presence in the international market.

Competition

Hargreaves Lansdown Plc faces competition from several key players in the financial services and investment management sector. These competitors include:

  1. Fidelity International
  2. Charles Schwab
  3. Vanguard Group
  4. Interactive Investor
  5. AJ Bell
  6. IG Group Holdings
  7. St. James's Place Wealth Management
  8. Standard Life Aberdeen
  9. Nutmeg

These companies offer similar products and services, including investment platforms, wealth management, and financial advisory services.

FinancialsEdit

What are the assumptions used to estimate the financial forecasts?Edit

Key inputs
Description Value Commentary
Revenue
What's the estimated current size of the total addressable market? $400,000,000,000 Here, the total addressable market (TAM) is defined as the global HR tech market, and based on a number of assumptions[Note 1], it is estimated that the size of the market as of today (7th November 2023), in terms of revenue, is $400 billion.
What is the estimated company lifespan? 50 years Currently (i.e. as of 26th May 2024), Hargreaves Lansdown employs 2,277 people, making the company a small organisation (less than 10,000 employees). That said, given the company's mission, we expect the company to grow to a large organisation, and research shows that the average lifespan of a large corporation is around 50 years.[1]
What's the estimated annual growth rate of the total addressable market over the lifecycle of the company? 3% Research shows that the growth rate of the global HR tech market (i.e. the total addressable market) is similar to the growth rate of global gross domestic product, which has averaged (medium) around 3% per year in the last 20 years (2001 to 2022)[2].
What's the estimated company peak market share? 1% The Stockhub users estimate that especially given the leadership of the company, the peak market share of Hargreaves Lansdown is around ccc%, and, therefore, suggests using the share amount here. As of 26th May 2024, Hargreaves Lansdown's current share of the market is estimated at around ccc%.
Which distribution function do you want to use to estimate company revenue? Logistic Research suggests that the revenue pattern of companies is similar to the pattern produced by the logistic growth function (i.e. the revenue distribution is S-shaped)[3], so the Stockhub users suggest using that function here.
What's the estimated standard deviation of company revenue? 5 years Another way of asking this question is this way: within how many years either side of the mean does 68% of revenue occur? Based on Hargreaves Lansdown's current estimated revenue amount (i.e. £ccc) and Hargreaves Lansdown's estimated lifespan (i.e. 50 years) and Hargreaves Lansdown's estimated current stage of its lifecycle (i.e. introduction stage), the Stockhub users suggest using five years (i.e. 68% of all sales happen within five years either side of the mean year), so that's what's used here.
Growth stages
How many main stages of growth is the company expected to go through? 2/3 stages Research suggests that a company typically goes through four distinct stages of cash flow growth.[4] Research also shows that incorporating those stages into the discounted cash flow model improves the quality of the model and, ultimately, the quality of the value estimation.[5]

In addition, research shows that a key way to determine the stage which a company is in is by examining the cash flow patterns of the company.[6] A summary of the economic links to cash flow patterns can be found in the appendix of this report. The Stockhub users estimate that with Hargreaves Lansdown's operating cash flows positive (+), investing cash flows positive (+) and its financing cash flows negative (-), the company is in the third stage of growth (i.e. the 'shake out' stage), and, therefore, it has a total of two main stages of growth. Note, to account for one-off events, the three-year average (median) amount was used to calculate the cash flows.

What proportion of the company lifecycle is represented by growth stage 1? 30% Research suggests 30%.[7]
What proportion of the company lifecycle is represented by growth stage 2? 10% Research suggests 10%.[7]
What proportion of the company lifecycle is represented by growth stage 3? 20% Research suggests 20%.[7]
What proportion of the company lifecycle is represented by growth stage 4? 40% Research suggests 40%.[7]
Growth stage 1
Cost of goods sold as a proportion of revenue (%) 22.08% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%) (78.39)% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%) (0.27)% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Depreciation and amortisation rate (%) 6.82% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed Capital Investment (FCInv) as a proportion of revenue (%) 36.30% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working Capital Investment (WCInv) as a proportion of revenue (%) 22.31% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Net borrowing as a proportion of revenue (%) 7.54% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Interest expense as a proportion of revenue (%) (7.54)% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 1)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Growth stage 2
Cost of goods sold as a proportion of revenue (%) 27.59% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%) 75.98% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%) 41.08% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Depreciation and amortisation rate (%) 5.86% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed Capital Investment (FCInv) as a proportion of revenue (%) 5.78% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working Capital Investment (WCInv) as a proportion of revenue (%) 55.99% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Net borrowing as a proportion of revenue (%) 18.25% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Interest expense as a proportion of revenue (%) 1.65% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Growth stage 3
Cost of goods sold as a proportion of revenue (%) 27.59% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%) 75.98% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%) 41.08% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Depreciation and amortisation rate (%) 5.86% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed Capital Investment (FCInv) as a proportion of revenue (%) 5.78% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working Capital Investment (WCInv) as a proportion of revenue (%) 55.99% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Net borrowing as a proportion of revenue (%) 18.25% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Interest expense as a proportion of revenue (%) 1.65% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Growth stage 4
Cost of goods sold as a proportion of revenue (%) 36.13% Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%) 174.39% Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%) (1.94)% Research suggests that it's best to use a similar rate as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Depreciation and amortisation rate (%) 47.29% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed Capital Investment (FCInv) as a proportion of revenue (%) 6.25% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working Capital Investment (WCInv) as a proportion of revenue (%) 2.13% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Net borrowing as a proportion of revenue (%) 0% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Interest expense as a proportion of revenue (%) 0% Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4)[8]. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.

RisksEdit

As with any investment, investing in Hargreaves Lansdown carries a level of risk. Overall, based on the Hargreaves Lansdown adjusted beta (i.e. ccc), the degree of risk associated with an investment in Hargreaves Lansdown is 'ccc'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used the 25 available share price Hargreaves Lansdown data points. We note that the amount of available data observations for Hargreaves Lansdown is less than what's typically used in the five years of monthly data beta calculation (i.e. 25 observations vs. 60 observations), and accordingly, calculating the beta of such a company may be considered by many to be abnormal; however, for the benefit of simplifying investment comparisons and decision making, we believe that a single standardised risk measure is useful, and that the most appropriate measure is beta.

The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.50 and 1.50. Further information about the beta ratings can be found in the appendix section of this report.

The key risks

Investing in Hargreaves Lansdown involves several key risks:

Market Risk: The value of investments can go down as well as up due to market fluctuations, potentially affecting investor returns.

Regulatory Risk: Changes in financial regulations or compliance requirements could impact the company's operations and profitability.

Operational Risk: Any disruption in the company’s operational processes or IT systems could negatively affect client services and trust.

Competitive Risk: Increasing competition from other financial service providers may affect market share and profitability.

Interest Rate Risk: Fluctuations in interest rates can impact the company's income from interest-bearing assets.

Credit Risk: Clients defaulting on loans or other obligations can result in financial losses for the company.

ValuationEdit

What are the assumptions used to estimate the return?Edit

Key inputs
Description Value Commentary
Which valuation model do you want to use? Discounted cash flow Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach[9], so that's the approach that he Stockhub users suggest to use here; nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the using the relative valuation approach (the valuation based on the relative approach can be found in the appendix of this report).

Peel Hunt has never paid cash dividends, and on 7th February 2022, it said that it currently does not anticipate paying any cash dividends in the foreseeable future. Accordingly, the Stockhub users suggest using the free cash flow valuation method (rather than the dividend discount model).

Which financial forecasts to use? Stockhub The only available long-term forecasts (i.e. >15 years) are the ones that are supplied by the Stockhub users (the forecasts can be found in the financials section of this report), so the Stockhub users suggest using those.
Growth stage 2
Discount rate (%) 15% There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
Probability of success (%) 80% Research suggests that a suitable rate for a company in this growth stage (i.e. stage 2) is 80%.
Growth stage 3
Discount rate (%) 10% There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
Probability of success (%) 100% Research suggests that a suitable rate for a company in this growth stage (i.e. stage 3) is 100%.
Growth stage 4
Discount rate (%) 10% There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
Probability of success (%) 100% Research suggests that a suitable rate for a company in this growth stage (i.e. stage 4) is 100%.
Other key inputs
What's the current value of the company? £127.11 million The current valuation of Peel Hunt as of 27th December 2023 is £127.11 million.
Which time period do you want to use to estimate the expected return? Between now and five years time Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years.[10] Accordingly, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.
Which valuation recommendation method do you want to use? Relative There's two main types of valuation recommendation methods, relative and absolute. The relative method determines the investment recommendation relative to other investments (e.g. the investment is "suitable" if it's within say the top 10% of the investment universe in terms of investment returns), whereas the absolute method determines the recommendation based on a fixed return amount (e.g. the investment is "suitable" if it returns 50% or more). Assuming sufficient data, the Stockhub users suggest using the relative method.
Which top proportion of the investment universe constitutes a "suitable" rating? 10% The proportion depends on the user's preference. That said, typically, the higher the proportion, the higher the risk associated with the investment.
Which universe of investments do you want to use? All investments If the main objective of the user is to maximise investment returns, then the Stockhub users suggest using 'all investments' as the investment universe.

AppendixEdit

  1. ↑ Cite error: Invalid <ref> tag; no text was provided for refs named Note01
  1. ↑ Stadler, Enduring Success, 3–5.
  2. ↑ https://www.macrotrends.net/countries/WLD/world/gdp-growth-rate
  3. ↑ https://decisionanalyticsjournal.springeropen.com/articles/10.1186/2193-8636-1-2
  4. ↑ Levie J, Lichtenstein BB (2010) A terminal assessment of stages theory: Introducing a dynamic approach to entrepreneurship. Entrepreneurship: Theory & Practice 34(2): 317–350. https://doi.org/10.1111/j.1540-6520.2010.00377.x
  5. ↑ Stef Hinfelaar et al.:, 2019.
  6. ↑ Dickinson, 2010.
  7. ↑ 7.0 7.1 7.2 7.3 http://escml.umd.edu/Papers/ObsCPMT.pdf
  8. ↑ 8.00 8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 8.10 8.11 8.12 8.13 8.14 8.15 8.16 8.17 8.18 8.19 8.20 8.21 8.22 8.23 8.24 8.25 8.26 8.27 8.28 8.29 8.30 8.31 http://people.stern.nyu.edu/adamodar/pdfiles/papers/younggrowth.pdf
  9. ↑ Demirakos et al., 2010; Gleason et al., 2013
  10. ↑ https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf
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