Investing in stellar growth stocks is one way to earn life-changing wealth from the stock market. The secret behind great growth stocks is simple: They are innovators in their space and grab market share at an ever-increasing pace. As a result, growth stocks see rapid revenue growth but also tend to trade at higher valuations.
One growth stock grabbing an increasing share of its market is Tradeweb Markets (TW 0.71%). For big institutional investors, Tradeweb is the equivalent of Morgan Stanley's E*Trade or Robinhood Markets as it offers an alternative and innovative trading platform for big investors interested in various markets, like U.S. Treasuries, corporate debt, and equities.
Tradeweb has been growing its market share for years for one simple reason -- it listens to its customers and continually updates its platform. The third quarter proved to be another stellar period for the company.
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Active markets helped drive Tradeweb's second-best quarter ever
In the third quarter, Tradeweb posted revenue of $265.3 million, up 24.6% from the prior year, while net income of $65.3 million was up 38.8%. The strong quarterly results have been emblematic of a strong 2021 overall for Tradeweb, which has seen revenue of $799.6 through nine months in 2021, up 21.2% year over year, while net income is up 40.3% to $213.1 million.
Tradeweb performed well because the average daily volume across all its products was up 24% from last year to $965 billion. One huge contributor was its record average daily volume in U.S. government bonds traded on the Tradeweb platform.
According to CEO Lee Olesky, revenue was helped by "healthy central bank issuance," which drove active government-bond trading markets. U.S. Treasury issuance has remained high since the pandemic began to fund COVID-related debt issuance in the trillions. Other spending bills will likely continue the high levels of Treasury issuance into the fourth quarter, a positive for Tradeweb.
A client-first mentality has more investors turning to Tradeweb
A couple of things Tradeweb has done well are listen to clients and create a better trading experience. Treasuries trading was boosted by Tradeweb's acquisition of Nasdaq's fixed-income trading platform, which it paid $190 million for and closed on June 25, 2021. This acquisition enhances Tradeweb's platform by giving clients various ways to trade Treasuries, improving their access to these investments while reducing the cost of trading.
Volume in interest-rate products like U.S. Treasuries and European bonds was robust in the third quarter, driving revenue of $265 million, up almost 25% from the same period last year. This came as Tradeweb increased its share of the U.S. Treasuries market from 13.8% at the end of 2020 to 17.1% by the end of the quarter.
Another area where Tradeweb has innovated for its clients is portfolio trading. Simply, this solution gives traders more control over managing portfolios while improving liquidity, or its clients' abilities to sell assets more quickly. Billy Hult, president of Tradeweb, said clients particularly like how Tradeweb's platform minimizes information leakage. Information leakage happens when an investor's trading information is revealed to other market participants. When this happens, sophisticated traders could front-run their trades and, ultimately, cost those institutions.
The company sees how hedge funds and others have embraced its portfolio trading product. But don't just take management's word for it. According to transactions reported in the Financial Industry Regulatory Authority's (FINRA's) Trace Reporting and Compliance Engine (TRACE), Tradeweb's high-grade market share was 12.6%, up from 7.7% last year, while its high-yield market share of 6.2% is up from 2.5% last year.
A stock priced for high growth
Tradeweb's expansion story can't be ignored, and it's why investors price the growth stock at a price-to-earnings (P/E) ratio of 84. The company has shown solid long-term growth and continues to grab market share quarter after quarter.
One positive trend for Tradeweb could be increased volatility in interest rates over the next few years. If inflationary pressures continue to persist, Federal Reserve officials would likely respond by raising interest rates, which in turn would generate higher volatility. Olesky went on to say the company "welcome(s) additional volatility in the markets, especially that's come with the rate rises." That's because the Tradeweb platform sees increased volume and, thus, increased revenue as volatility rises.
While increased volatility could help the business, Tradeweb's biggest advantage is listening to clients and expanding its platform features to meet clients' growing needs. Adding Nasdaq's fixed-income business was one step of the process, and it continues to look for attractive companies to acquire that will improve its platform. With such a focus on clients' experiences, it's clear why Tradeweb has been such a stellar performer.
