With nothing more than a passing glance, the stock brokerage industry of today looks more or less like it did 20 years ago. And, with the exception of computerized trade execution, the brokerage business doesn't look all that different than how it looked 50 years ago.
There are subtle, slow changes afoot, however, that spell opportunity for investors able to see the how the industry is evolving. A relatively young and small (for now) player called Tradeweb Markets (TW 0.21%) is leading this charge, and rewarding shareholders handsomely as a result. In fact, the stock is up 240% just since its April 2019 IPO, reaching another record high late last month.
There are three key reasons the best may be yet to come.
Tradewhat?
Don't sweat it if you haven't heard of it -- most people haven't. Tradeweb offers a variety of services to the capital markets world, but most of it is behind-the-scenes stuff. It's possible you've benefited from one of its platforms without even realizing it. The company's only been around in a recognizable form for a few years now.
But what a few years! Last year's big accolades include being named GlobalCapital's OTC (over-the-counter) trading venue of the year, and FOW Global Investor Group's Trading and Execution Solution of the Year. Tradeweb Markets facilitated the trading of $20 trillion worth of investments in December alone, capping off a record-breaking year for trade volume.
Image source: Getty Images.
As the old saying goes, there's plenty more where that came from. Here's why current and would-be shareholders can look forward to it.
1. It's a robust one-stop shop
Most brokers and back-office support providers do a few things well. Tradeweb does a huge number of things incredibly well. While its roots are in bond trading, the company can handle everything from stocks to credit default swaps and more. More than that, Tradeweb Markets offers trade reporting data and swap execution facilities required by regulators, as well as market data that investors -- individual as well as institutional -- increasingly want.
It matters. As the investing arena becomes more complex at the same time that it's growing and accelerating, brokerage firms are looking for simple, turnkey solutions. Tradeweb is that solution.
2. The capital markets business is ripe for consolidation
Given the sector's maturity, it's a surprising premise. It's true nonetheless. This sector is loaded with start-ups and early-stage outfits that are prime acquisition targets. Virtu Financial, privately owned Clearpool, BGC Partners, and cryptocurrency derivative trading platform Opyn are just a sampling of the possible deals that would widen Tradeweb's net.
The company's certainly got a solid history of savvy dealmaking. A great deal of its deep reach into the global bond market can be attributed to last year's acquisition of Nasdaq's U.S. fixed-income electronic trading platform, and 2013's purchase of BondDesk Group, which offers bond trading services specifically for advisors and middle market investors. In the meantime it snatched up CodeStreet, improving liquidity for bond traders using the company's platforms. These and several other acquisitions have led to a steady streak of revenue and earnings growth.
Data source: Thomson Reuters. Chart by author.
3. More investors are more active than ever before
Finally (and perhaps most importantly), the world's capital markets business has never been busier, or boasted a bigger following. Yet there's room and reason to expect more expansion for years to come.
To put things in perspective, Bank of America indicated in April of last year that people had poured more money into the stock market during the prior five months than they had in the prior 12 years combined. Brokerage firm Charles Schwab tells a similar story from a different perspective, indicating that 15% of the country's current investors got their start in 2020, prompted by the pandemic. While they're typically smaller than average investors, they're active and hungry for the sort of service Tradeweb Markets offers. Schwab's survey also says 94% of the market's younger investors are looking for trading tools and information.
Also note that America's aging baby boomers will sooner than later be passing along their $35 trillion in collective wealth to their kids or grandkids, who may be more apt to actively trade it than tuck it away for the long haul.
Worth the price
Stepping into Tradeweb won't come cheap. Even with its 15% tumble from last month's high (as of Monday's prices), the stock's still priced at 53 times 2021's projected final profit, and 47 times this year's anticipated earnings. That's rich by nearly any standard.
This is a company, however, with a bright future based on a proven past that's worth the premium. Just bear in mind monster-sized growth stories require time and patience, as they tend to be a little more volatile than most other stocks.
