Innovation In Trading Tech Drives Revenue Growth Amid Regulatory Challenges

Key Takeaways

• MarketAxess is enhancing U.S. market share with new trading capabilities, targeting revenue growth via increased trading volumes.
  
• Strategic diversification in emerging markets and partnership with S&P Global aim to expand revenue through improved analytics and electronification.
  
• MarketAxess risks revenue and market share declines due to shifts in trading practices, heightened competition, and unfavorable regulatory changes.

Catalysts

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

• MarketAxess is focusing on increasing its U.S. high-grade market share by launching new trading capabilities, such as enhanced portfolio trading and targeted block trading solutions. These initiatives aim to drive revenue through market share growth and increased trading volumes.
  
• The company's strategic diversification into emerging markets, with significant trading volume growth in Latin America and APAC, presents an opportunity for revenue expansion as these markets become further electronified.
  
• The strategic partnership with S&P Global to enhance MarketAxess's fixed income data offerings could lead to increased revenue from both data services and improved trading capabilities through better pre-trade analytics.
  
• Adoption of advanced technologies such as the AI-driven dealer selection tool for block trades and the automation of trading protocols is expected to improve efficiency and possibly net margins due to reduced operational costs and increased trading throughput.
  
• MarketAxess's advancements in dealer-to-dealer trading services and the growth of its Open Trading liquidity pool are expected to increase trade volumes and commission revenue, contributing to earnings growth over time.

MarketAxess Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MarketAxess Holdings's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.3% today to 36.2% in 3 years time.
• Analysts expect earnings to reach $375.7 million (and earnings per share of $9.99) by about November 2027, up from $278.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2027 earnings, down from 36.2x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

MarketAxess Holdings Future Earnings Per Share Growth

Risks

• The decline in MarketAxess's U.S. high-grade market share due to reduced portfolio trading and a client shift to large block trading poses a risk, potentially impacting revenue if the trend continues without sufficient adaptation.
  
• An increase in block trading volumes moving to phone and chat rather than via electronic platforms could limit MarketAxess's market share growth and affect their fee capture and earnings, assuming the company cannot fully transition these trades to their electronic platform.
  
• Although regulatory changes are expected with adjustments in the U.S. political landscape, a shift away from favorable regulations could alter competitive dynamics and market structure, thereby affecting MarketAxess's revenue and net margins negatively if dealer operations adapt to less restrictive regulations.
  
• Competitive pressures in portfolios trading remain significant, as acknowledging that the company's offerings are still behind primary competitors could limit its revenue growth in this segment if enhancements are not well-received or broadly adopted by clients.
  
• Varied assumptions about the macroeconomic environment, such as increased volatility, while potentially beneficial for some aspects of MarketAxess's operations, can also lead to wider uncertainties impacting credit spread volatility and overall earnings unpredictability if trends do not align with expectations.

Valuation

• The analysts have a consensus price target of $285.83 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 $335.0, and the most bearish reporting a price target of just $187.0.
• 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 $375.7 million, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 6.7%.
• Given the current share price of $267.81, the analyst's price target of $285.83 is 6.3% higher. 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.