Expanding Electronic Trading Horizons Sparks Revenue Surge And Margin Growth

Key Takeaways

• Expanding electronic trading across various fixed income products and investing in technology drives revenue growth through increased market share.
  
• International expansion and the introduction of new trading protocols aim to enhance user experience and open new revenue streams.
  
• Dependency on market volatility and acquisitions like ICD introduces risks in operational efficiency and revenue growth amidst challenges from emerging technologies and growing competition.

Catalysts

Tradeweb Markets Inc., together with its subsidiaries, builds and operates electronic marketplaces worldwide.

• Expanding the electronic trading platform across more fixed income products, including U.S. treasuries, interest rate swaps, and credit, driving revenue growth through increased market share and client activity.
  
• Investment in technology and infrastructure, notably through acquisitions such as ICD, to enhance trading efficiency and client engagement, likely contributing to higher revenues and potentially improved net margins.
  
• Growth in portfolio trading and automation, particularly in U.S. credit and global interest rate swaps, expected to drive increased trading volumes and revenue expansion, alongside improved operational efficiencies and margin expansion.
  
• International expansion and focus on emerging markets (EM), with efforts to increase adoption of portfolio trading and RFQ offerings, expected to open new revenue streams and contribute to overall growth.
  
• Continuous development and rollout of new trading protocols and products, such as RFQ Edge for credit trading, aiming to enhance user experience, deepen market penetration, and drive revenue growth from increased trading activity.

Assumptions

• Analysts are assuming Tradeweb Markets's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.7% today to 40.7% in 3 years time.
• Analysts expect earnings to reach $851.4 million (and earnings per share of $3.2) by about September 2027, up from $432.9 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 40.9x on those 2027 earnings, down from 55.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 0.7% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Risks

• Concerns around managing integration and realizing synergies from the recent high-profile acquisitions like ICD, which could impact operational efficiency and distract from core business focus, potentially affecting net margins and revenue growth.
  
• Heavy reliance on market volatility for trading volumes, which can be unpredictable and may not sustainably support long-term revenue growth if market conditions stabilize or become less favorable, impacting overall earnings.
  
• The increasing commitments to invest in emerging digital technologies such as blockchain, which while potentially transformative, carry execution risk and may not deliver expected returns or benefits to the business, potentially affecting net margins.
  
• The growing competition in areas of strength such as portfolio trading in credit markets, where dominance is challenged by the buy-side's desire for diversification among platforms, could lead to a loss of market share and impact revenue growth.
  
• Regulatory changes and global macroeconomic factors like election outcomes could introduce uncertainty and affect trading activities across the platform, potentially impacting revenue streams especially from interest rate swaps and credit products.

Valuation

• The analysts have a consensus price target of $119.93 for Tradeweb Markets 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 $134.0, and the most bearish reporting a price target of just $92.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $851.4 million, and it would be trading on a PE ratio of 40.9x, assuming you use a discount rate of 6.4%.
• Given the current share price of $111.81, the analyst's price target of $119.93 is 6.8% 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.