Should you buy, hold or sell Hub24 shares?

Hub24 (ASX: HUB) is a rapidly growing technology platform in the wealth industry, led by a management team with a client-centric philosophy and a great track record of bringing innovative solutions to the market.

We first invested in Hub24 in 2017 when it had less than 1% market share of the wealth platform market.

Today it has a 6% share, and we believe its penetration will continue to grow materially over the coming decade.

What Hub24 does

Hub24 is an independent technology platform that sits between a financial advisor and their clients.

Advisors utilise it to execute client investment strategies and streamline operational workflow across their practice. Clients access the platform for ongoing wealth visibility and reporting tools. Its main source of revenue is the fee tiers charged to assets under administration on the platform.

Strategy and outlook

The business continues to innovate at an impressive rate, increasing its differentiation and competitive advantage versus incumbent platforms. This has resulted in Hub24 ranking as the top rated platform according to multiple industry experts.

Understanding the slope of the future innovation curve is key to appreciating the opportunity for a business like Hub24 to increase its differentiation and, ultimately, its edge over competitors.

One great example here is Hub24's future focus on solving adviser practice management problems - particularly as it relates to adviser compliance burdens inflating the cost to deliver advice to retail clients.

After many years of development, HubConnect Licensee is coming to market as a data structuring engine to help licensees and practices increase business transparency, manage compliance obligations more efficiently, and automate more workflows.

This growing differentiation positions Hub24 to continue expanding its market share across the wealth industry, as advisers increasingly shift from incumbent platforms to the most innovative solutions.

To put some numbers around this, compared to its current 6% penetration of funds on wealth platforms, it is taking 12% of gross industry flows and has relationships with over 20% of financial advisors. In our view, all of these numbers will head north over time.

We expect Hub24's increasing scale to translate into healthy top line growth, operating leverage, and much higher free cash flow over time. We see the fair value of Hub24 meaningfully higher than its current share price and believe our long-term investment will be continually rewarded.

Returns

Markets are often driven by short-term events and take time to recognise fair value in share prices.

More recently, Hub24's share price has been driven by quarterly flow data (money moving onto its platform) which is running below its FY22 highs - causing the market to question whether or not flows have already peaked.

We see it differently. Our industry work suggests recent flow declines are being driven by numerous external factors such as high term deposit rates attracting money off wealth platforms, and advisers taking a cautious approach to deploying client money into investment strategies given current market volatility.

In our view, there's a lot of cash on the sidelines waiting to be redeployed into investment portfolios that reside on wealth platforms. In short, we believe flows will return to structural growth as these external factors subside.

Recommendations

As a high-conviction fund manager, ECP only invests when we have in-depth research supporting our assertions for long-term growth, return and risk factors in our portfolio companies.

We believe it's important to understand both the narrative of an investment and the drivers behind the numbers that support it.

We believe it is important for investors to conduct their own due diligence when considering investment decisions, and find investment managers which can demonstrate the depth of work behind their investment holdings.

Hub24 is a clear technology leader taking share in a structurally growing market, which paves the way for continual revenue growth and operating leverage.

By taking a long-term view, we are able to see through the short-term clouds, and the future looks bright for Hub - that is why it holds a place in our portfolio.

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