Should Investors Book Profit in this Financial Services Stock – GLXY

Galaxy Digital (TSX: GLXY) is a technology-driven financial services and investment management firm that provides institutions and direct clients with a full suite of financial solutions spanning the digital assets ecosystem. Moreover, it operates in the following businesses: Trading, Asset Management, Principal Investments, and Investment Banking.

Why should Investors Book Profit?

• Falling trading volumes: In the reported period of Q3 2021, the company’s counterparty trading volumes decreased 28% from record highs in the previous sequential quarter. Falling trading volumes is a sign of worry as it can bring the dent in the company’s net income.

• Weak liquidity profile: The company is witnessing continuous decline in its current ratio on the sequential basis, which is a sign of worry. Moreover, in Q3 FY21, the company's current ratio was 0.52x compared to the industry median of 1.62x. This lower ratio against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Stretched valuations: GLXY shares are available at NTM EV/Sales multiple of 6.7x compared to the industry (Financials) median of 3.3x and on NTM Price/ Book Value multiple it is trading at 2.7x against an industry median of 1.1x. This implies that the shares are overvalued against the industry. Higher valuations against an industry draws a caution line.

• Trading above the upper band of the Bollinger Bands: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Book Value based multiple

Analysis by Kalkine Group

Stock recommendation

The company's financial performance has been remarkable, both in terms of topline and bottom-line growth. However, the management, on the other hand, highlighted the fading counterparty trade volumes on a sequential basis, which is a source of concern. Furthermore, the company's liquidity ratio is low when compared to the industry median, indicating a negative liquidity profile which is also declining on a constant basis.

In addition, GLXY's stock is trading at stretched values, and technical indications suggest that the stock price may drop or consolidate further. Therefore, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the last closing price of CAD 25.76 on March 29, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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