Trading at a lofty average price-to-earnings (P/E) ratio of 50 during the past decade, MarketAxess (MKTX 0.10%) and its electronic bond trading platform is a perfect example of a stock I loved but couldn't stomach buying in large quantities.
With less than 40% of the U.S. corporate bond market electronically traded, MarketAxess' leadership position in its burgeoning niche made it seem like a no-brainer investment. And the market priced it as such. However, after pulling forward a couple of years' worth of sales growth in 2020 -- as the pandemic encouraged electronic trading's adoption and higher volatility boosted trading volume -- MarketAxess has struggled mightily.
Now trading 63% below its all-time highs, is the company's new once-in-a-decade valuation a buying opportunity or a value trap? Here's why I'm thinking the former.
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MarketAxess: The co-leader in electronic bond trading
Powered by its Open Trading platform, MarketAxess estimates it saved its 2,100 clients more than $700 million on their trades in 2023 thanks to its deep liquidity. This value proposition, paired with MarketAxess' data, automated trading technology, and post-trade services, have proven indispensable among its clients, with the company reporting rising revenue for 15 consecutive years.
MKTX Revenue (TTM) data by YCharts
Despite this nearly 10-fold revenue increase since its initial public offering (IPO), the company has seen its share of the U.S. corporate bond and Eurobond markets decline in recent years. One culprit leading to this market share loss has been the rise of portfolio trading in the U.S. corporate bond industry and MarketAxess's late arrival to the area.
Portfolio trading allows institutions to get immediate, diversified exposure to a bond area of their choosing rather than buying each bond individually. Virtually nonexistent before 2018, portfolio trading now accounts for roughly 8% of U.S. bond trading volume. After missing out on this initial shift toward portfolio trading, MarketAxess is playing catch-up -- but it's seeing early signs of success.
Launching its new X-Pro trading platform (which the company calls a "cockpit" for traders), MarketAxess saw average daily volume (ADV) tied to portfolio trading rise 160% in January versus last year. Emphasizing portfolio trading, automated trading, and quantitative trading technology (through its recent Pragma acquisition), X-Pro should help fend off Tradeweb, which has grown to become a co-leader in U.S. bonds.
Now armed with X-Pro, MarketAxess can add ADV not only through these upfront "batch" trades but also through the subsequent (generally large) trades made by institutions unwinding these portfolio trades, one bond at a time. In simplest terms, the company missed a lot of trickle-down trading volume by not having a portfolio trading offering available right out of the gate, but now it appears primed to make up for lost time.
Persistent, top-tier profitability fuels a rising dividend
Despite increased spending needed to integrate its recent Pragma acquisition and build out its new X-Pro platform, MarketAxess has remained supremely profitable.
MKTX Profit Margin data by YCharts
Thanks to this robust 34% net profit margin, MarketAxess has increased its dividend payments for 14 consecutive years. Now yielding 1.3%, the dividend has been raised by 19% annually during the past decade, yet it only equaled 43% of the company's net income last year. This leaves plenty of room for management to continue raising the dividend over the long haul, further boosting shareholder returns.
A once-in-a-decade valuation
Now the cherry on top for investors: Despite making strides in the portfolio trading department while maintaining immense profitability and a growing dividend, MarketAxess trades at a once-in-a-decade P/E ratio.
MKTX PE Ratio data by YCharts
At 32 times earnings, the company hasn't had a valuation this low since 2014. Although this P/E ratio is a premium to the S&P 500's average of 23, it is essential to remember that only 40% of U.S. corporate bonds trade electronically today, leaving an undeniable opportunity ahead for MarketAxess.
Meanwhile, its dividend yield has never been higher outside of a brief moment in 2023, further highlighting the company's attractive valuation. Ultimately, as the bond market continues its march toward becoming fully electronic (as stock trading essentially is), MarketAxess should continue succeeding alongside Tradeweb far into the future. Down 63% from its all-time highs -- despite obvious trends working in its favor -- MarketAxess makes for a magnificent buy-and-hold-for-ages investment.
