Global Expansion And Tech Innovations Set To Propel Market Dominance And Revenue Surge

Key Takeaways

• MarketAxess' focus on enhancing liquidity and trading outcomes through technological advancements like AI and modern interfaces aims to increase commission revenue and margins.
  
• The company's strategic growth through international expansion, acquisitions, and innovative trading solutions indicates a long-term vision for revenue expansion and market dominance.
  
• Expansion, reliance on technology, aggressive market share strategies, and acquisitions pose risks to MarketAxess' earnings stability and profit margins.

Catalysts

Operates an electronic trading platform for institutional investor and broker-dealer companies worldwide.

• MarketAxess' global rollout of X-Pro, a modernized user interface, is anticipated to return the company to market share growth by enhancing liquidity and trading outcomes, potentially increasing commission revenue.
  
• Expansion into international credit markets and emerging markets, demonstrated by growing market shares and trading volumes in these areas, is poised to contribute significantly to future revenue growth.
  
• Investment in automation and artificial intelligence, such as AI dealer selection tools and custom algorithms, aims to improve trade efficiency and outcomes, which could lead to higher commission revenue and expanded margins.
  
• The company's strategic initiatives in Open Trading and portfolio trading solutions are expected to capture more share in larger trade sizes and diversify trading protocols, potentially boosting overall trading volume and fee income.
  
• MarketAxess' emphasis on disciplined expense management, even while pursuing growth through acquisitions like Pragma and strategic hires, suggests a focus on improving net margins while positioning for long-term revenue expansion.

Assumptions

• Analysts are assuming MarketAxess Holdings's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 33.7% today to 35.8% in 3 years time.
• Analysts expect earnings to reach $365.8 million (and earnings per share of $9.73) by about October 2027, up from $262.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $326.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.5x on those 2027 earnings, down from 42.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

Risks

• MarketAxess' continuous expansion into emerging markets represents a risk of operational complexity and increased exposure to volatile economic conditions in these regions, potentially impacting earnings stability.
  
• The reliance on technological advancements, such as the rollout of X-Pro and AI-driven tools for trading, introduces risks related to the proper execution and acceptance of these technologies, which could affect trading volume and revenue if not adopted as expected.
  
• The strategy to grow market share in the highly competitive client-to-dealer e-trading space may not yield the expected results, impacting future revenue growth and profitability.
  
• The reliance on acquisitions like Pragma for growth introduces risks associated with integration and achieving synergies, potentially affecting net margins if these acquisitions do not perform as expected.
  
• MarketAxess' efforts to attack the segment of larger trade sizes and portfolio trading with new tools and algorithms could face challenges from market acceptance or competitive offerings, impacting commission revenue and fee capture rates.

Valuation

• The analysts have a consensus price target of $281.92 for MarketAxess Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $330.0, and the most bearish reporting a price target of just $195.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $365.8 million, and it would be trading on a PE ratio of 34.5x, assuming you use a discount rate of 6.6%.
• Given the current share price of $292.33, the analyst's price target of $281.92 is 3.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.