TW - Tradeweb Markets: Performing Well With Higher Growth And Better Margins

2023-07-19 05:12:06 ET

Summary

• Tradeweb, a leading provider of electronic trading platforms.
• The company's revenue has grown by 15% over the last seven years, with a diversified revenue profile across various segments.
• The business has developed its value proposition well, with a wide range of asset classes with high daily volume.
• Tradeweb's margins have been continually improving, with scope for additional improvement in the coming years.
• Relative to its peers, Tradeweb is performing well, with higher growth and slightly better margins.

Investment thesis

Our current investment thesis is:

• Tradeweb has a high-quality business model, providing a large range of asset classes with deep liquidity, as well as technological superiority and deep product expertise.
• With the business outgrowing the wider industry, it is gaining market share. We see no reason for this to slow.
• Relative to peers, the company is performing well, particularly because it remains on an upward trajectory.

Company description

Tradeweb ( TW ) is a leading provider of electronic trading platforms and technology solutions for the global fixed-income, derivatives, and ETF markets. The company facilitates electronic trading and provides access to liquidity, market data, and post-trade services to a broad range of market participants, including institutional investors, dealers, and issuers.

Share price

Tradeweb's share price has performed well since listing, returning almost 100% since 2019. During this time, markets have struggled with economic conditions, yet Tradeweb has done well. This is due to its continued growth in the last few years.

Financial analysis

Presented above is Tradeweb's financial performance for the last 7 years.

Revenue & Commercial Factors

Tradeweb's revenue has grown at an impressive rate of 15% in the last 7 years. During this period, growth has been consistently impressive, with only one year below 10%. This is across both its US domestic business and internationally, as it aggressively expands.

Business Model

Tradeweb provides its clients with access to a wide range of global markets within which asset classes can be traded. The company targets a range of investors from Institutional clients, Wholesale (dealers), and Retail. This allows the business to access a large portion of the investing community, broadening its addressable market.

Tradeweb allows investors to trade the following asset classes:

• Rates: Trading of fixed-income securities, including government bonds, agency bonds, corporate bonds, and interest rate swaps.
• Credit: Trading of corporate bonds, credit default swaps (CDS), and other credit instruments.
• Money Markets: Trading of money market instruments, including repurchase agreements (repos) and short-term interest rate products.
• Equities: Trading of exchange-traded funds (ETFs), equities, and equity-related products.
• Mortgages: Trading of agency mortgage-backed securities (MBS), non-agency MBS, and other mortgage-related products.
• Emerging Markets: Trading of fixed income and derivative products in emerging markets.

This broad approach allows the business to successfully acquire a wide range of clients, specifically catering to those investors who hold a range of assets, namely asset managers. This is highly lucrative as these firms generally take a long-term view (less volatile with volume) and trade regularly.

Within these segments, the breadth of products is high, with a clear focus on maximizing the assets available to institutional investors, further compounding the value provided through choice.

Providing access to a wide range of assets is theoretically easy, and so on paper, this should not be a clear competitive advantage. However, in reality, it is difficult due to the requirement for sufficient liquidity. Investors need to be able to buy and sell their assets in a reasonable time frame and at an appropriate cost. This is a key benefit provided by Tradeweb, with a large daily volume across its asset classes (c.$1.1t daily) and support for block trades.

This gives Tradeweb a diversified revenue profile, with a healthy allocation of revenue across various segments. The business does have high exposure to debt, however, which does leave Tradeweb somewhat cyclical to growing and contracting debt markets.

Tradeweb generates revenue primarily through transaction-based fees and subscription fees for access to its electronic trading platforms and market data. The subscription fees allow the business to soften the volatility of revenue growth, as trading volume is highly dependent on market conditions. The company also offers value-added services, such as post-trade processing and reporting solutions, which contribute to its overall revenue mix.

Underpinning its operations is a healthy investment in its technological development. This allows the business to minimize its cost through digitalization, as well as the development of pre to post-trade capabilities to ensure the best process for its clients.

Tradeweb's product development has generally been successful, with consistent new launches. The business utilizes its relationships with investors to understand key growth areas. Although there has not been any significant launch in recent years, the company continues to develop new products for mainstream use.

Looking ahead, Tradeweb is forecasting healthy market growth, as investors continue to demand access to these markets at growing volumes. With elevated rates currently, the growth in money markets looks to be outperforming, while rates and credit remain strong. Further, it is worth noting that Tradeweb continues to outperform the wider market, implying it is still winning market share.

Competitive Positioning

Tradeweb has several competitive advantages that differentiate it in the market:

• Tradeweb offers a comprehensive range of products across multiple asset classes, providing market participants with a single point of access for their trading needs.
• The company has established strong relationships with a vast network of liquidity providers, enabling it to offer deep liquidity and competitive pricing to its customers.
• The company has a long-standing reputation as a pioneer in electronic trading, with deep expertise in developing and operating advanced trading platforms.

Underpinning these factors is strong technological and product development, alongside a general upward trajectory in the market.

Capital Market Industry

Competition among trade facilitators revolves around market access, liquidity, pricing, and functionality. Tradeweb faces competition from Bloomberg, MarketAxess ( MKTX ), Euronext ( EUXTF ), MTS ( LDNXF ), ICE Bonds ( ICE ), CME ( CME ), Liquidnet, and Plus500 ( PLSQF ).

The fixed-income and derivatives markets are undergoing a significant shift towards electronic trading, driven by regulatory changes, cost pressures, and the need for increased transparency. Tradeweb's growth trajectory is a reflection of its positioning regarding this, with a high-quality platform focused on electronic trading. As this transition continues, we believe Tradeweb is well placed.

Ongoing regulatory reforms continue to reshape the market structure, presenting both opportunities, through the opening of markets, as well as threats, through the imposition of stricter reporting and transparency requirements. Regulation driving electronification and Capital Reforms in China are contributing to secular tailwinds.

The use of advanced data analytics and AI technologies is becoming more prevalent in the trading process, enabling participants to gain insights, automate workflows, and enhance decision-making. This is a key opportunity that Tradeweb is exploiting, with the creation of its AiEX. This is a smart automated trading service, allowing investors to minimize transaction costs and reduce operational risk. As the following charts illustrate, the growth trajectory for this has been strong.

Tradeweb can expand its presence in emerging markets and regions with significant growth potential, offering its electronic trading capabilities and liquidity solutions to a broader customer base. This should continue to be a key focus for the business, given the ease at which it can expand relative to other industries. The critical factor will be ensuring regulatory compliance. Further, expanding its exposure to assets within these regions could equally expand the volumes traded. Tradeweb believes there is $1bn+ to gain through this expansion.

Other key developments Management is working on include:

• China Bonds, with Tradeweb being the first offshore platform to offer foreign investors electronic access to Bond Connect and CIBM.
• Portfolio trading, the bundling of complex assets into a single transaction.
• Additional equity products such as single stocks and ADRs
• Continuation of M&A to support an expansion of its services.
• Expanding its ETF offerings, such as through providing bulk-trading capabilities.

Margins

Tradeweb's margins have gradually improved over the historical period, with an OPM of 36% and a NIM of 26%. This improvement has been driven by increased volume in conjunction with operating cost leverage, improved operational capabilities, and improved monetization.

With margins increasing into FY22, it is likely that further improvement is possible, especially if it can continue to launch new products, further expanding its value proposition.

Outlook

Presented above is Wall Street's consensus view on the coming 5 years.

Analysts are forecasting a continuation of its current growth trajectory, with a rate of 10%, alongside an improvement in margins. With healthy revenue growth in Q1 (6%) and further margin improvement (OPM +4.1%), this looks to be a reasonable estimate.

Industry analysis

Presented above is a comparison of Tradeweb's growth and profitability to the average of its industry, as defined by Seeking Alpha (18 companies).

This peer group is incredibly high performing, with high margins and strong growth. Despite this, Tradeweb looks comparably attractive, managing to hold its own.

From a growth perspective, the business is marginally outperforming, reflecting its current growth trajectory and market share gains.

Margins are also currently higher, financially illustrating the underlying qualities of the business. This is clearly not a generic market exchange but has developed a business model that allows it to generate outsized profits.

Valuation

Tradeweb is currently trading at 46x LTM P/E and 32x NTM P/E. This is a premium to its historical average.

A premium to its historical average is undoubtedly warranted, as the business has expanded its products and clients rapidly during this period. Further, the business has achieved operational improvements, contributing to higher margins.

A premium to its peer group is also warranted in our view, given the superior growth and margins. Further, based on our commercial analysis in conjunction with the financial performance as a result of it, it is clear to us that Tradeweb has developed a highly competitive position in the market. For this reason, a premium is justifiable while the business takes market share and continues to develop its capabilities.

With the business trading at a NTM discount to its peers, we believe there is upside at its current share price.

Key risks with our thesis

The risks to our current thesis are:

• Volume decline. With uncertain market conditions and unclear visibility on rate movements, volume levels are currently uneasy. There is a risk that the current bear market could continue, or the market improvement in the first half of the year is short-lived.
• Competitor response. Thus far, Tradeweb has been able to grow without sufficient competition to slow its trajectory. There is a risk that competitor response could impact the business.

Final thoughts

Tradeweb is a high-quality business. The company has achieved attractive growth through product expansion, a deep liquidity pool, access to a wide range of assets, and technological development. The business is gaining market share and we see no reason for its current trajectory to slow into the medium term.

The business is expensive but it is a reflection of the quality of the business.

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