RBC says IG Group selloff overdone as it backs Underdog deal

RBC Capital Markets reiterated an Outperform rating on IG Group (LSE:IGG) after the stock was punished for its acquisition of prediction market operator Underdog. Analyst Ben Bathurst set a 1,850p price target, implying ~43% total returns versus the 1,332p closing level on 13 August.

Analysis

The market is likely over-penalizing the transaction as if it were a balance-sheet event rather than an option on a new engagement layer. If Underdog is bought at a sensible price and used as a front-end funnel, the bigger economic lever is not near-term revenue but higher trading frequency, lower churn, and a broader customer cohort that can be cross-sold into IG’s higher-margin core products. That matters because online trading platforms typically rerate on sustained activity metrics, not headline M&A.

The second-order winner is IG’s retention economics: prediction markets attract younger, more event-driven users who are expensive to acquire through traditional performance marketing. If IG can convert even a modest share of that traffic into recurring platform users, the payback period on acquisition spend compresses and the core business becomes less reliant on cyclical volatility spikes. Competitively, that could force peers like CMC Markets and Plus500 to respond with their own event-driven products, which would raise industry innovation but also tighten differentiation and marketing intensity.

Near term, the key risk is regulatory and product-execution lag: this thesis does not work if prediction-market products are constrained, delayed, or kept separate from the main app experience. Over the next 1-3 months, the stock likely trades on disclosure quality around deal economics, integration, and any signal on customer conversion; over 6-18 months, the real test is whether activity per user and net deposits inflect. The thesis is falsified if management is forced to spend heavily to maintain volumes without showing higher retention or if regulators narrow the product scope.

Consensus is probably focused on the distraction risk and missing the call-option asymmetry: the downside from a small acquisition is capped, while the upside from creating a new acquisition channel is potentially material. If the next update shows even early evidence of cross-sell or improved engagement, the multiple can expand faster than earnings, because the market will begin discounting a platform re-acceleration rather than a one-off corporate action.

Key Decisions for Investors

• Buy IGGHY / IGG on weakness over the next 1-2 sessions if the market keeps pricing this as a pure integration mistake; target a 10-15% rerating into the next trading update, with thesis anchored on engagement optionality rather than immediate EPS accretion.
• Pair trade: long IGG vs short CMCX or PLUS for 1-3 months, betting that IG gets credit for product innovation while peers remain more exposed to commoditized retail trading flows; stop if IG discloses material dilution or regulatory friction.
• Set a catalyst alert for the next quarterly metrics: if active clients, trading frequency, or net deposits fail to improve, exit quickly; if engagement ticks higher, add on confirmation because the market will likely move to a higher terminal multiple.
• For more convex exposure, consider a limited-risk long call structure on IGG with a 3-6 month horizon, but only if option pricing remains cheap relative to implied volatility; the thesis needs a re-rating, not just modest earnings beats.
• If regulators signal any restriction on prediction-market product approval, fade the move and reassess immediately; that is the cleanest falsifier for the optionality thesis.