On the surface WisdomTree Investments (WETF) appears to be a rapidly growing company that justifies its lofty valuation of 60-times trailing earnings, 17-times sales, and 24-times book value. In fact the company's revenues doubled from the third quarter of 2012 to the third quarter of last year. Profits more than tripled during the same time frame.
While investors don't expect growth to continue at break-neck speed, they do foresee profit growth exceeding 50% in the next year. This is due to secular growth in the ETF market generally, and the company's track record of launching innovative ETFs--most notably the Japan Hedged Equity Fund (DXJ).
However, I think that the company's 2013 growth was largely the result of the unrepeatable success of the Japan Hedged Equity Fund, which saw its AUM surge from about $2 billion a year ago to nearly $13 billion today.
In order to more accurately measure the company's growth I submit that we should "correct" the company's actual AUM and sales growth to exclude the Japan Hedged Equity Fund's success on the assumption that, while it was a great success, it almost certainly cannot be repeated. In doing so I maintain that the company's future growth prospects are far more modest than what analysts have projected.
Without the success of the Japan Hedged Equity Fund WisdomTree's AUM growth would have been modest--24%. But it gets worse. About half of the growth ex-DXJ was due to growth in U. S. equity funds, which saw soaring stock prices as a significant tailwind. U. S. equity AUM grew by nearly 60%, but equities were up nearly 30% when over the past 20 years the S&P500 has a CAGR of about 7.5%. If we normalize last year for an "average" U. S. equity market performance we have to shave 1/4 of the growth we saw from WisdomTree last year, and so we are down to about 18% AUM
