Rising Competition Will Test Digital Asset Trading While ETF Expansion Offers Potential Upsides

Key Takeaways

• Increased competition and reliance on new market expansion may challenge Virtu Financial's revenue growth and market share.
  
• Sustainability of retail engagement and rising costs from market volatility pose risks to net margins and long-term earnings.
  
• Strong market making performance, diversification, and strategic expansions, combined with technology modernization and share buybacks, could enhance earnings stability and shareholder value.

Catalysts

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

• Virtu Financial's growth may be hindered by increased competition in the digital asset trading market, potentially impacting future revenue growth due to pressure on market share.
  
• The company's bet on expanding its Execution Services relies heavily on maintaining a high level of product adoption and cross-selling, which may not sustain momentum, risking lower earnings projections.
  
• The sustainability of retail engagement levels is uncertain, with any potential decrease potentially impacting Market Making revenue and compressing net trading margins.
  
• There is a reliance on the expansion into new markets and products like digital assets and ETFs for growth, which might not deliver the expected results, affecting long-term earnings growth targets.
  
• Increased margin requirements due to market volatility could put pressure on liquidity, potentially increasing financing costs and affecting net profit margins adversely.

Virtu Financial Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Virtu Financial compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Virtu Financial's revenue will decrease by 9.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.5% today to 29.8% in 3 years time.
• The bearish analysts expect earnings to reach $538.4 million (and earnings per share of $3.6) by about May 2028, up from $301.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 11.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 2.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.47%, as per the Simply Wall St company report.

Virtu Financial Future Earnings Per Share Growth

Risks

• Virtu Financial's Market Making had its best quarter since the first quarter of 2021, driven by enhancements in retail and global noncustomer Market Making businesses, indicating the potential for sustained high net trading income and improved revenue.
  
• The firm has demonstrated strong diversification with its global Market Making operations across different asset classes and geographies such as digital assets, fixed income instruments, and ETFs, which may lead to increased earnings resilience and revenue stability even in challenging market conditions.
  
• Virtu Execution Services reported its seventh straight quarter of increasing net trading income, supported by product penetration and cross-selling, which suggests potential growth in recurring revenue streams and profitability.
  
• The continued expansion and modernization of technology platforms, including Virtu Technology Services, and success in integrating acquisitions are enhancing operational efficiency, which could improve net margins and drive earnings growth.
  
• Virtu's strategic share buyback program has effectively reduced the fully diluted share count, potentially enhancing earnings per share and delivering shareholder value, which could counteract any downward pressure on the share price.

Valuation

• The assumed bearish price target for Virtu Financial is $30.55, which represents two standard deviations below the consensus price target of $41.67. This valuation is based on what can be assumed as the expectations of Virtu Financial's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 $28.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $538.4 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 9.5%.
• Given the current share price of $41.37, the bearish analyst price target of $30.55 is 35.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.