The abrdn share price is down 23% in the last year, should I buy?

In the volatile asset management space, the abrdn (LSE:ABDN) share price has dropped by 23% in the past year. Many companies in the sector have been forced to evolve quickly amid regulation, fierce competition, and limited profits. But is there potentially some good news around the corner?

The fundamentals

The business is a significant player in the asset management sector. With operations across the UK, Europe, North America, and Asia, it offers a broad range of investment products. Rebranding from Standard Life Aberdeen to abrdn in 2021 was part of a strategic effort to modernise and streamline. Despite these changes, the share price has struggled, and is down significantly since.

Financially, abrdn’s recent performance has been mixed. Earnings are forecast to grow by 55.37% annually, well above the average of the sector at 19%. However, revenue is expected to decline over the coming years, with the sector generally growing revenues steadily. Not a disaster, but potentially a sign of a company in transition.

Interestingly for investors, the business has an appealing dividend yield of 10.35%, although has been volatile in recent years, and is not covered by earnings or cash flows, suggesting potential sustainability issues.

Risks galore

For me, there are plenty of risks to worry about here. My primary concern is the intense competition within the asset management industry. Competitors like BlackRock and Vanguard often dominate the market, pressuring smaller firms on fees and market share. Smaller and less diverse companies in the sector must continuously innovate and retain clients to remain competitive.

Economic uncertainties, such as inflation and geopolitical tensions have also clearly impacted the space in recent years. The share price of such companies are pinned to the performance of the investments, and in such a difficult market, it becomes very difficult to meet expectations.

Even with such a steep decline, a discounted cash flow calculation suggests the business is still overvalued by about 9%.

In such a volatile period, extensive restructuring efforts, while aimed at long-term growth, entail short-term disruptions and costs. There is a chance that the worst of this uncertainty is now over, but it’s clearly a difficult risk to mitigate.

The potential

Despite these risks, there are compelling reasons for considering an investment in abrdn. The substantial drop in share price could represent a buying opportunity if one believes in the company’s turnaround strategy and long-term potential. The forecasted annual earnings growth noted suggests that the company is on a path to recovery, even turning a small profit this year.

The price-to-sales (P/S) ratio, of 1.8 times puts it well below the sector average of 5.1 times. If the business can settle the recent volatility, maintain recent growth in earnings, and reassure investors, I wouldn’t be surprised to see this one reward long-term investors.

Overall

The competitive landscape, market volatility, and restructuring efforts clearly necessitate a cautious approach for investors. Although the recent fall in the abrdn share price may represent an opportunity, I still feel like there is a long road ahead until investors can be confident in their decision. I can see the potential, but will only be adding to my watchlist for now.