I rate Forge Global Holdings, Inc. (NYSE:FRGE) stock as a Buy now. My rating for FRGE is revised from a Hold to a Buy, taking into account the company’s performance and prospects. Forge Global’s recent Q2 results were above expectations. Furthermore, FRGE’s financial outlook is positive, as the US IPO market has recovered and the company has cost optimization plans in place.
Previously, I performed a preview of FRGE’s Q4 2023 financial results in my prior November 14, 2023 update. With this latest write-up, the spotlight is on Forge Global’s recently disclosed second quarter financial performance.
Q2 2024 Results Beat Wall Street’s Expectations
FRGE announced its Q2 2024 financial results on Wednesday, August 7. Forge Global’s actual second quarter performance surprised the market in a positive way.
The company’s top line increased by +33% YoY from $16.7 million for the second quarter of the previous year to $22.3 million in the latest quarter.
FRGE’s revenue growth has accelerated significantly in Q2 2024, as its top line expanded by relatively more modest YoY growth rates of +13% and +24% for Q4 2023 and Q1 2024, respectively. Forge Global achieved a +9% revenue beat for the latest quarter, as its actual top line turned out to be higher than the Wall Street analysts’ consensus projection of $20.4 million, according to S&P Capital IQ data.
At its Q2 2024 results briefing, Forge Global noted that its private securities marketplace business has experienced “upward momentum” as “buyers return to the private market” and “valuations continue to trend upward.” This is reflected in the key metrics disclosed by FRGE. The number of trades on Forge Global’s private securities marketplace platform rose by +86% YoY and +37% QoQ to 831 (source: results announcement) in the second quarter of this year. Also, FRGE highlighted in its July 11 monthly private markets report that June 2024 saw “the top 25% of companies” on its proprietary private market index “trade at a slight premium to their primary valuation for the first time” this year.
Separately, Forge Global’s Q2 2024 losses narrowed substantially in the most recent quarter and surpassed the sell side’s expectations.
The actual Q2 2024 normalized EBITDA loss of -$7.9 million for FRGE was a meaningful improvement as compared to the company’s Q2 2023 and Q1 2024 non-GAAP adjusted EBITDA losses of -$11.8 million and -$13.5 million, respectively.
Forge Global’s GAAP net loss attributable to shareholders narrowed from -$24.9 million in the second quarter of 2023 and -$18.6 million in the first quarter of 2024 to -$13.7 million for the recent quarter.
As a comparison, the sell-side analysts had previously anticipated that FRGE will report a non-GAAP adjusted EBITDA loss of -$10.8 million and a GAAP net loss of -$20.8 million (source: S&P Capital IQ) in Q2 2024.
Moving ahead, FRGE’s financial outlook is positive, considering the IPO market’s recovery. The company indicated at its second quarter earnings call that there is a “reasonable correlation” between its “transactional revenue” and “the health of the U.S. IPO market” as per “historic data.” Notably, Q2 2024 witnessed 35 U.S. public listings, which is the highest quarterly figure in the past nine quarters according to S&P Global research. The private market tends to become more active, when the IPO market becomes healthier and the chances of successful exits via public listings get better.
In the next section, I touch on Forge Global’s profitability prospects in light of the company’s narrower-than-expected losses in the latest quarter.
FRGE Is Moving Closer To Meeting Its FY 2026 EBITDA Breakeven Goal
Forge Global could potentially reach a key operating profitability inflection point in FY 2026, and this might serve as a re-rating catalyst for the company’s shares.
FRGE guided at its Q2 2024 analyst briefing that it “should achieve breakeven adjusted EBITDA in 2026.” I take the view that Forge Global is in a good position to meet the company’s FY 2026 EBITDA breakeven target.
The company’s most recent management commentary suggests that top-line growth acceleration will boost its future operating profitability. At FRGE’s second quarter analyst call, Forge Global noted that its Q2 EBITDA loss narrowed “as revenue improved” (my emphasis) and highlighted that its “models project reaching breakeven adjusted EBITDA sometime in 2026 based on organic growth alone” (my emphasis).
In the preceding section, I outlined Forge Global’s revenue growth acceleration and its resulting narrower losses in Q2 2024. I also wrote that FRGE’s revenue prospects have become more favorable, as a recovery of the U.S. IPO market is positively correlated with the company’s top-line expansion. In other words, Forge Global will most probably come closer to realizing its FY 2026 EBITDA breakeven goal, as its top-line increases in tandem with the improving health of the IPO market and the private market.
On the other hand, the company disclosed an aggressive workforce optimization plan as part of its Q2 2024 results announcement.
In specific terms, FRGE is targeting to deliver annualized cost reductions of around $11.3 million before the end of this year. A key component of Forge Global’s expense management efforts is the plan to cut 9% of its workforce so as to achieve an -11% reduction in staff costs.
Forge Global is currently trading at a consensus next twelve months’ Enterprise Value-to-Revenue or EV/R ratio of slightly above 1 times or 1.06 times (source: S&P Capital IQ) to be exact. Assuming that FRGE does turn EBITDA positive after 2026, it is fair to think that the stock can benefit from valuation mean reversion. As a reference, Forge Global’s all-time historical consensus forward EV/R multiple was a much higher 2.1 times as per S&P Capital IQ data. As such, it won’t be unreasonable for FRGE to trade at a higher EV/R metric like 1.3 times or even better, reflective of a meaningful 30% premium to revenue.
Risk Factors To Consider
Investors should watch two key risks before they think of initiating an investment in FRGE.
The first risk is that the private market and IPO market go into a slump, which will affect Forge Global’s top-line outlook in a negative manner.
The second risk is that FRGE doesn’t execute well on its cost management initiatives, and the company takes a longer period of time to achieve the desired improvement in profitability.
Closing Thoughts
I have turned bullish on Forge Global, after analyzing the company’s Q2 results and medium-term profitability outlook. FRGE registered a +9% top-line beat for the second quarter, and the company expects to reach EBITDA breakeven in fiscal 2026. The stock’s valuations are appealing, considering its EV/R ratio, which is just slightly over 1x.
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