You're probably familiar with retail trading platforms like TD Ameritrade, E*Trade and Robinhood. But the pros need more specialized tools, and increasingly, their go-to partner is Tradeweb Markets (NASDAQ:TW).
Tradeweb is a leading provider of electronic trading to institutional customers like hedge funds, insurance companies, and central banks, as well as wholesale traders like market makers. The company went public two years ago, but it has played an important role in electronic trading since 1996, the year it first dipped into the U.S. Treasury market. While the company was boosted by record trading activity in 2020, it has been growing at an impressive rate for years now. Not only that, but it continues to take an increasing share of the market from some of its biggest competitors.
Tradeweb continues to invest in technology, setting it up for strong growth. However, a price-to-earnings ratio around 90 puts this stock on the expensive end of the spectrum. With such lofty expectations from investors, is Tradeweb a buy?
What it does
Tradeweb operates in over 65 countries serving 2,500 clients on more than 40 different products. It generates revenue from transaction fees, subscription fees, and commissions, and it makes 77% of its revenue from two asset classes: rates and credit. Its biggest asset class is in rates, a broad term it uses to describe interest rate assets like U.S. Treasuries, European government bonds, and other securitized products. In 2020, rates accounted for $134 trillion in volume on its platform, raking in $476 million in revenue.
Credit is its next-biggest asset class, and includes things like high-yield corporate debt, municipal bonds, and credit default swaps. Credit accounted for $6 trillion in volume on its platform, and brought in $213 million in revenue.
An impressive growth story
What makes Tradeweb stand out to me is a stellar history of growth that it has maintained through multiple market environments. From 2004 to 2020, its revenue grew at an impressive 12.5% compound annual growth rate (CAGR). Even more astounding is that it has posted record revenue for 21 consecutive years, an impressive feat considering the two recessions during this time period.
Tradeweb's impressive growth can be attributed to its continuous investments in technology. Since 2016, it has invested $318 million in technology to improve its electronic markets platform and expand product offerings for clients.
Last year, the company announced it would acquire Nasdaq's U.S. fixed-income trading platform, which is used for trading U.S. Treasuries. The company will integrate it into Tradeweb's Dealerweb platform for wholesale traders. The acquisition cost the company $190 million and should be finalized in late 2021, and it's another way the company will make gains in market share.
Capturing more market share from competition
This past year saw a very active trading environment across different asset classes. Massive fiscal spending has resulted in the U.S. government and other governments issuing huge amounts of debt. All the new spending by governments and corporations has been a positive for Tradeweb, with increased volumes in its rates assets during the year.
The company competes with the likes of Nasdaq, Bloomberg, Intercontinental Exchange, and CME Group. Despite its big-name competitors, the company continues to grab an increasing share of the market. From 2016 to 2020, Tradeweb's share of the U.S. Treasuries trading market went from 7.5% to 13.8%, nearly doubling.
Additionally, the company noted it captured 14% of its total addressable market based on average daily volume last year, which includes all of its products: rates, credit, ETFs, and money markets. Since 2015, the size of the addressable markets has increased at a 9% CAGR, while Tradeweb's volume in these markets has grown at an impressive 23% CAGR, another sign that the company's volume is outpacing the growth of the broader market.
On the expensive side but a good company
The company sports a price-to-earnings ratio just over 90 and a price-to-book ratio of 3.6 at Friday morning's prices. While it appears to be on the more expensive side, this could also be a reflection of high future earnings expectations from investors. Management is optimistic about the future, pointing to favorable growth trends like technological advances in trading, the increasing amount of debt securities, and data-driven trading.
Given Tradeweb's impressive growth since its founding in 1996, the valuation may be justified. The company continues to invest in its electronic trading platform and has taken an increasing market share in recent years. Impressive growth of the top and bottom lines over decades combined with continued innovation make Tradeweb an appealing growth stock worth considering for the long haul.