MarketAxess Stock Has Growth Potential In The Short-Term

MKTX: MarketAxess logo
MKTX
MarketAxess

After a 56% rally since the March 23 lows of the last year, at the current price of $440 per share, we believe MarketAxess Holdings Stock (NASDAQ: MKTX) has more upside potential. MarketAxess, which operates leading electronic trading platforms for fixed-income securities, has seen its stock rally from $281 to $440 off the March 2020 bottom compared to the S&P which moved around 85% – the stock is lagging the broader markets and has lost 23% YTD. That said, the company has reported a solid 35% y-o-y growth in the full year 2020 revenues, thanks to the significant increase in bond trading volumes in the year. The trend continued in the first-quarter FY2021 as well, with the company posting revenues of $195.5 million – up 16% y-o-y. Further, its profitability figures have also improved for both full-year 2020 and the first quarter, driven by higher revenues. Hence, there is a mismatch between MKTX’s stock growth rate and its revenue growth.

Despite the recent drop, MarketAxess’ stock is trading above the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. We feel that the company’s stock still has potential as its revenues have benefited from the higher bond trading volumes and its valuation implies it has further to go.

While the company’s total revenues rose around 75% from $393 million in 2017 to about $689 million in 2020, it translated into a 102% increase in the net income figure. The net income margin also grew from 37.6% to 43.4% over the same period, primarily driven by higher revenues.

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The company has seen steady growth in revenue and earnings over 2017-2020, and its P/E multiple has increased. We believe the stock is trading below its near-term potential despite the possible weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 118% Change In MarketAxess Stock Between 2017-End And Now?” has the underlying numbers.

MarketAxess’ P/E multiple has changed from just above 50x in FY 2017 to close to 70x in FY 2020. While the company’s P/E is around 55x now, there is some scope for an upside when the current P/E is compared to levels seen in the past years – P/E multiple of around 68x at the end of 2019 and 70x at the end of 2020.

So Where Is The Stock Headed?

MarketAxess reported a strong performance in 2020 – revenues increased by 35% y-o-y to $689 million. This could be attributed to a 37% y-o-y growth in commissions followed by a 12% rise in information services revenues. The company derives commissions for trades executed on its electronic platforms between and among institutional investors and broker-dealer clients and monthly distribution fees, which contributes roughly 92% of the total revenues. The commissions are calculated as a percentage of the notional dollar volume of bonds traded, which implies that higher bond trading volumes will generate higher revenues for the company. MKTX’s bond trading volumes have increased over the recent quarters. Its total U.S. high-grade trading volume gained 10% y-o-y in the first quarter coupled with a 15% growth in total credit trading volumes. Further, its market share of U.S. high‐grade credit has improved in the first quarter to an estimated 20.5% from an estimated 20.0% in the year-ago period. Overall, the company has posted positive growth in the top and bottom line over the recent quarters, and we expect the same trend to continue in the coming months. The continued growth momentum in the MarketAxess’ revenue and profitability figures is likely to boost investor sentiment toward the stock, positively impacting its stock price.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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