Market Making Expansion In Asia And Europe Will Unlock Opportunities

Key Takeaways

• Strategic investments in expanding geographies and asset classes are set to enhance Virtu Financial's market reach and future revenue streams.
  
• Technological advancements and operational improvements drive recurring revenue and are expected to boost Virtu's net margins and earnings growth over time.
  
• Reliance on retail participation and exposure to interest rate changes, combined with inherent market volatility and inflation, could impact revenue stability and net margins.

Catalysts

Operates as a financial services company in the United States, Ireland, and internationally.

• Virtu Financial is expanding its Market Making operations into new asset classes and geographies, such as Asia, India, Japan, and Europe, while increasing its coverage in digital assets, energy products, and ETF blocks, which is expected to enhance its future revenue streams.
  
• The VES (Virtu Execution Services) business is scaling rapidly due to product penetration and cross-selling with Virtu's highly performing Execution Services offerings, indicating strong future revenue growth potential.
  
• Virtu's technological advancements in workflow and analytics products, along with a focus on client integration, are driving recurring revenue streams and are expected to increase net margins over time.
  
• The company's strategic investments in expanding its products and market reach, as well as operational improvements, aim to enhance its capabilities in both customer and noncustomer Market Making businesses, which will positively impact future earnings.
  
• Virtu's aggressive share buyback program and commitment to returning capital to shareholders are expected to compound earnings growth, thereby positively influencing earnings per share (EPS) in the medium to long term.

Virtu Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Virtu Financial's revenue will decrease by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 28.1% in 3 years time.
• Analysts expect earnings to reach $497.9 million (and earnings per share of $3.36) by about April 2028, up from $260.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 2.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.32%, as per the Simply Wall St company report.

Virtu Financial Future Earnings Per Share Growth

Risks

• The company faces inherent volatility in its business, as highlighted by a clear up-and-to-the-right skew of results over the years. This volatility could make revenue and earnings unpredictable, impacting investor confidence and stock stability.
  
• Reliance on retail and noncustomer performance could pose risks if retail participation declines or external market conditions change, potentially affecting trading income and revenue streams.
  
• Market infrastructure stresses, such as increased margin requirements during high volatility periods, could create liquidity constraints or operational challenges, impacting revenue and operational costs.
  
• Exposure to interest rate movements despite offsetting strategies like interest rate swaps resulting in financing interest expenses and affecting net margins during periods of rate hikes.
  
• Quote from Cindy Lee indicates operating expenses are subject to inflationary pressures, which could pinch net margins unless managed effectively.

Valuation

• The analysts have a consensus price target of $40.556 for Virtu Financial 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 $48.0, and the most bearish reporting a price target of just $26.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $497.9 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $38.59, the analyst price target of $40.56 is 4.8% 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.