It’s been a great year for financials – the sector is up around 18% in 2021, just behind energy. So when you see a financial services company like MarketAxess Holdings (NASDAQ: MKTX) among the worst performers of S&P 500 – down around 8% since the start of the year through April 21, and now 3% more since he released results on Thursday – he tends to raise a red flag. Why is it declining compared to its competitors?
But when you dig a little deeper, you’ll see that the stock’s performance isn’t entirely indicative of the company’s performance. In fact, I think the stock remains a solid buy. Here’s why.
Solid sales in the first quarter
Despite the stock slump, MarketAxess, which provides an electronic platform for fixed income trading, posted strong first quarter earnings. The company posted record revenue of $ 195 million, up 16% year-over-year. Operating income rose 14% to $ 103 million, while net income was $ 80 million, or $ 2.11 per share, up 8% year-on-year the other.
The performance was driven by a record trading volume of $ 246 billion on MarketAxess’ Open Trading platform, a 20% improvement over the previous year. The company was able to increase its market share of high-quality US credit trading to 20.5%, from 20%, and US high-yielding loans to 15.6%, from 12.2%. This has led to higher income as MarketAxess receives a fee every time there is a trade on its platform. The company derives about 90% of its revenue from these fees.
“Market share gains are driving volume and revenue growth as electronic trading continues to advance in fixed income markets around the world,” said Chief Executive Officer Rick McVey. “We are seeing positive signs in new product areas and in all geographies as we invest to support long-term growth. Transaction automation continues to accelerate with our investor and dealer customers.”
So why is the stock falling, given the strong performance of the company?
Although expenses increased 18.1% year-over-year, this was mainly due to the increase in the number of employees as the company added new positions to keep up with its growth. The acquisition of MuniBrokers, an electronic platform for municipal bond traders, also resulted in higher costs. The transaction, which closed in April, will expand the trading capabilities of MarketAxess beyond the United States to Europe, the United Kingdom and Singapore.
Both of these moves are expected to be earnings accretive and increase the growth of the company, as its debt is relatively low and margins high, with an operating margin of around 54%.
More likely, the decline in the stock price was related to what a lot of tech stocks experienced in the quarter, a pullback after a long growth spurt. MarketAxess has been in growth mode for the last decade, with a total return over that period of over 3000% and an annualized return of 41% – without a single year of negative returns. Its price-to-earnings ratio peaked at 72 at the end of the quarter at the end of 2020. It is now back at around 66, which is still higher than it has historically been for around five years.
But it is a fintech with significant growth potential, as the sales figures for the first quarter have shown. As the market leader in electronic credit trading and one of the few major players, MarketAxess is gearing up for a strong race. Electronic trading will only gain in popularity, given the accelerating trends, and volumes are expected to remain high.
So don’t be scared by the drop in the first trimester. MarketAxess is a great company in a growing industry with a lot of growth ahead of it.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.