MarketAxess Holdings (NASDAQ: MKTX) isn’t exactly a household name, but it’s a financial services firm that should be on the radar of investors. In this Fool live Video clip, recorded on March 25Fool.com contributor Brian Feroldi explains why it’s such an amazing company and why there is still so much room to grow.
Brian Feroldi: So the company is called MarketAxess. The stock symbol is MKTX. It is not a business that you will be interacting with in your day to day life. In fact, it only has a few thousand customers around the world, but it really is an amazing company. If you look at the company’s stock market performance since its IPO in 2005, you’re talking about a 27-bagger and counting. You’ll understand why in a moment, but this is just a phenomenally successful, phenomenally successful business.
What are they doing? It is the world’s largest electronic fixed income trading platform. Everyone here is buying and selling stocks online. It would be crazy for us to call a broker or call someone else in your local community and say, “Hi, I’m looking to buy some MasterCard shares, do you have any for me? “Believe it or not, this is how the bond market works. Most trading in the bond market is done by email or SMS, or by simple communication or if you want to buy or sell a Bond, the Most of it has been happening off-platform. It’s been like that for decades, centuries. In the year 2000, there was a trader who was at JP Morgan. He saw this and said, “That’s crazy. equity trading is online, why shouldn’t bond trading and fixed income trading go online? ”At a JP Morgan incubator, he founded MarketAxess and he mainly benefits from all the benefits of online trading and bring them to the bond market.
There are a lot of advantages. Liquidity is higher, transparency is there, it is easier to follow data aggregation. There are huge advantages to trading, buying and selling online over the old method. This company was launched in 2000 and over time has steadily added new products to its platform and has continued to attract new customers. I think a big reason is that they had the backing of a lot of big financial institutions at the start, especially JP Morgan. The company has constantly added new products, expanded geographically, added new clients, and has grown into the world’s largest electronic fixed income trading platform.
Their position in the market really benefits them because markets have natural network effects. If you want to trade bonds online, which platform would you like to go to? The one with the most market participants. You will get the most choice and the most cash. Exactly the same, if you want to sell. MarketAxess has more than 1,800 institutional level investors and dealers on its platform around the world, and each year it adds more and more clients. He convinces each of his clients to devote more of their bond trading to the platform and launches new products and services.
He started with the US high yield market, he added the European market, he added emerging market bonds to that, and he sees opportunities to add CDs and get loans over time. Due to its position and the benefits offered by the platform, the revenue of this company has grown like clockwork. He’s just an extremely consistent and reliable producer. What is even more interesting is that the margins of this company are essentially at the level of Mastercard. Its gross margin is 77% and its net margin, after deducting all fees, including taxes, is 43%. He keeps $ 0.43 on every dollar in sales. That’s a ridiculously high number. This company is extremely scalable and has a very high margin.
Over time, although it is certainly the biggest player in the market, the company still sees great potential for growth where it is today. It has around 1,800 market participants in total, much of which is still focused on its core market. It will expand internationally. He basically says that about $ 67 billion in fixed income credit products are traded every day. On his platform, he only makes around $ 9-10 billion. It was in September. It still looks huge for his growth and he points out that for every 1% market share he gets, he gets an additional $ 33-35 million in income.
Because this is just a fixed cost business, all of that extra income is basically turned into profits. It is an extremely compelling business. Now, on the valuation side, the business is very high quality, so it is also very expensive. The company trades at around 29 times its sales and around 63 times its profit. The business is hyper-optimized for profit. It’s a real P / E ratio. It’s an expensive business. But if there is one company that deserves to be cherished, it is MarketAxess.
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