Leveraging Technology Investments Will Unlock Future Market Opportunities

Key Takeaways

• Expansion of Virtu Technology Solutions and Virtu Execution Services targets growth by efficiently distributing technology and entering underpenetrated markets.
  
• Investments in global options and ETF Block growth could lead to increased market-making opportunities and earnings enhancements.
  
• Regulatory changes and market fluctuations pose risks to liquidity and trading income, while growth initiatives depend on successful technology integration and local expertise.

Catalysts

Operates as a financial services company in the United States, Asia Pacific, Canada, EMEA, Ireland, and internationally.

• The continued expansion of Virtu Technology Solutions (VTS) is allowing Virtu to distribute its scale technology efficiently, potentially leading to long-term growth in revenues by serving growing midsized and regional broker-dealers.
  
• Increased focus on Virtu Execution Services (VES) with global multi-asset-class enabled products is expected to fuel long-term growth in revenues, particularly in underpenetrated markets such as the Middle East, India, and Japan.
  
• Virtu's investment in expanding global options capabilities, including options in Asia and U.S. equities, is a top priority, which could contribute positively to earnings as these markets present substantial growth opportunities.
  
• The company's growth in ETF Block onboarding new clients and expanding symbol coverage potentially boosts revenue through increased market-making opportunities.
  
• Continuation of the share repurchase program indicates an intention to drive earnings per share growth, suggesting efficient use of capital to enhance shareholder returns.

Virtu Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Virtu Financial's revenue will decrease by -7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 31.6% in 3 years time.
• Analysts expect earnings to reach $470.7 million (and earnings per share of $2.8) by about December 2027, up from $176.3 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 16.2x on those 2027 earnings, down from 17.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.95%, as per the Simply Wall St company report.

Virtu Financial Future Earnings Per Share Growth

Risks

• The regulatory changes, such as the SEC's equity market structure proposal, could have unintended consequences on liquidity and spread, potentially elevating transaction costs for institutional clients and impacting market-making revenues.
  
• Fluctuations in market volumes and volatility, as suggested by weakness in segments like crypto with a decline in Bitcoin ETF activity, pose risks to maintaining consistent trading income.
  
• Despite initiatives in organic growth segments such as options and international markets, their success is contingent on obtaining local expertise and successful technology integration, which could impact execution success and long-term revenue potential.
  
• Regulations targeting areas like zero-dated options might require changes in capital management, potentially affecting the profitability of certain trading operations or necessitating increased resource allocation without commensurate revenue increases.
  
• The execution of share repurchases at higher stock prices may reduce the efficiency of capital returns to shareholders, impacting overall net margins if substantial growth does not materialize to offset capital outflows.

Valuation

• The analysts have a consensus price target of $35.11 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 $52.0, 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 2027, revenues will be $1.5 billion, earnings will come to $470.7 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 8.9%.
• Given the current share price of $36.29, the analyst's price target of $35.11 is 3.4% 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.