When a significant number of analysts rate a stock as a buy, it is often a pretty good indicator that the stock is at least worth looking into. However, it doesn’t always mean that it is, in fact, a buy. It is always important for investors to do their own research to see if the stock makes sense for their portfolio. There are only so many stocks one can buy, so one has to be selective.
That brings us to fintechs, which for many years have been the darlings of the financial sector. Unfortunately, last year’s bubble burst a lot of fintech stocks, and some have not recovered. However, there is one fintech that has navigated the market’s ups and downs fairly well and remains a consensus buy among analysts. Tradeweb Markets (NASDAQ:TW) is up some 47% year to date, and analysts say it has room to grow. Are they right?
Tradeweb Markets has a record quarter
Tradeweb Markets runs an electronic trading platform specializing in fixed-income trading. It began in 1998 as a trading network for U.S. Treasuries, and it grew from there to include various bonds, money markets, interest rate products, and other forms of fixed income, along with derivatives, equities, exchange-traded funds, and more. However, it is predominantly a platform for fixed-income trading and is among the leaders in the space, particularly for U.S. Treasuries.
In this period of high interest rates with yields as high as they have been in 15 years, it has been a great time to invest in money markets and certain bonds. This environment has created a lot of trading activity on Tradeweb’s platform, which has led to record volume and revenue.
In the third quarter, Tradeweb Markets saw its average daily volume (ADV) increase 30% year over year to $1.4 trillion. The quarter also saw record volume in U.S. High Grade credit, global repurchase agreements, Chinese bonds and swaps. Tradeweb also snagged a record 16.6% share of the fully electronic U.S. High Grade market and a record 7.8% share of the fully electronic U.S. High Yield market.
This translated into record revenue of $328 million in the quarter, an increase of 14.4% year over year, and $112 million in net income, a 37% increase over the third quarter of 2022. The biggest revenue generator was Treasuries, or rates, which pulled in $173 million, a 17% increase. Revenue from credit volume jumped 15% to $90 million, while money market revenue surged 21% to $16 million.
“Tradeweb delivered record third-quarter revenues as heightened focus on fixed income and a sustained period of high interest rates dominated institutional, wholesale and retail client sectors,” Tradeweb CEO Billy Hult said.
A good call?
Things did not slow down for Tradeweb in October as its ADV for the month was a record $1.75 trillion, up 66% from October 2022. In fact, with interest rates expected to remain elevated for the next year or two and stock markets projected to have middling returns in 2024, the market for fixed-income investments should continue to be robust. That’s good news for Tradeweb.
Additionally, Tradeweb has made several moves to expand its reach, recently closing on its acquisition of Yieldbroker, a leading trading platform for Australian and New Zealand government bonds and interest rate derivatives. Further, it announced a new licensing agreement with the London Stock Exchange Group (LSEG)’s Data & Analytics division to distribute its market data and a strategic partnership with FTSE Russell to develop fixed-income pricing and index trading. Tradeweb is also investing in technology, announcing in November that it was acquiring R8fin, which specializes in algorithm-based execution for U.S. Treasuries and interest rate futures.
Even with these acquisitions, Tradeweb maintains a strong balance sheet with some $1.5 billion in cash on hand and relatively little debt. It has high margins, including an operating margin of 39%, and it increased its free cash flow by 16% in the last quarter to $645 million.
One concern is its valuation. Tradeweb’s price-to-earnings (P/E) ratio has jumped to 56 from 45 on June 30, with a forward P/E of around 43. For such a high-growth company, it is going to run a little hotter, and it has historically been in the 40-to-50 range since it became a public company in 2018. However, in the fall of 2021 when it crashed, it had a P/E ratio of over 90, so it’s not there yet.
I’d keep an eye on that, but it shouldn’t move much higher and will probably go lower as I don’t see the stock maintaining the same high-growth rates it has enjoyed over the second half of this year. So is it a buy? I would suggest it’s a cautious one, requiring a close eye on the company’s valuation.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
