Founded in 1998 and based in New York, Tradeweb Markets is one of the leading bond trading platforms.
Although it offers electronic processing for certain voice-traded transactions, the Company’s primary focus is on providing electronic trading networks that connect broker/dealers, institutional clients and retail clients.
Although the company offers trading on a wide variety of products, the bulk of its business is in US and European government debt, mortgage-backed securities (MBS), interest rate swaps and bonds. of American and international companies.
The company also sells bond trading and pricing data, primarily through an agreement with Refinitiv’s Eikon service.
Focus on bond markets
Tradeweb operates one of the leading electronic bond and derivatives trading platforms.
Unlike many of its competitors, which tend to focus on a particular type of bond or market segment, Tradeweb operates with a broad scope, offering trading of just about anything related to bonds, including including derivatives, as well as certain ETFs.
That said, Tradeweb’s interest rate and credit segments are the heart of the business, accounting for 79% of its revenue in 2021, and are responsible for much of its growth.
Development of electronic trading
Bond markets globally are increasingly moving away from voice-traded transactions to electronic platforms, as the improved liquidity and workflow of these electronic networks promises to reduce costs. implicit and explicit negotiation skills for increasingly cost-conscious companies.
Tradeweb has been a major beneficiary of this trend, as its main competitor is the implicit competition represented by traditional voice-based commerce.
As the bond and derivatives markets have changed, Tradeweb has benefited from strong tailwinds to its business and has steadily gained overall market share, interest rate swap volumes and US investment grade bonds in particular rapidly increasing.
That said, the US corporate bond market remains competitive and the pace of Tradeweb’s gains should slow in our view.
Virtuous network effect
We expect this transition to continue, as the more liquidity there is available on an electronic network, the more attractive these networks become for traders, attracting even more volume and creating a virtuous circle.
As Tradeweb rolls out new features such as automated trade execution and portfolio trading, the cost advantages of electronic trading networks over traditional methods continue to grow.
With most bond trading primarily voice-based, this transition is still in its early stages and Tradeweb has a long path of growth ahead of it.
While revenue growth is expected to slow from an impressive CAGR of 21% over the past four years, we expect Tradeweb to experience double-digit growth for years to come.
Our fair value estimate for Tradeweb is $84, which is 63 times our earnings estimate for 2022, including depreciation expense associated with Refinitiv’s pent-up accounting.
This translates into a 2022 enterprise value to EBITDA ratio of 28.3 times.
We expect Tradeweb to continue to benefit from the transition to e-commerce and continue to take market share from traditional voice-based commerce.
This will help Tradeweb grow its revenue at an average rate of 12.4% from 2021 to 2026.
Expected increase in margins
We expect this growth to come primarily from the rates and credit markets, which generate the bulk of Tradeweb’s revenue.
The bulk of this growth should come from higher trading volume, not price increases, as we expect the company’s pricing schedules to remain largely unchanged.
We expect Tradeweb to continue its strategy of becoming increasingly transactional, as transaction-by-transaction fees grow faster than fixed fees and company data revenues.
We expect variable royalty revenue to reach approximately 75% of total revenue by 2026, up from 64% in 2021.
On the expense side, we expect operating expenses to grow at an average rate of approximately 10.8% from 2021 to 2026 and depreciation and amortization charges to remain largely unchanged over the next five years.
We expect Tradeweb margins to increase to 38% by 2026 on a reported basis.
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