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MarketAxess (MKTX) Down 26% This Year: What Ails the Stock?

MarketAxess Holdings Inc. MKTX has been under pressure this year so far as investors grew bearish on the stock due to weakness in its trading volumes. The stock has lost 25.7% year to date after rising 50% in 2020.

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Even analysts are not sanguine about the stock, and downgraded 2021 and 2022 earnings estimates for the company. Over the past 30 days, the same has been revised 0.4% and 0.7% downward, respectively.

The company’s primary source of revenues is commission generated from bonds traded on its platform, and therefore, the volumes of trade executed and transacted on its platform are of key importance. This is a serious concern for the company.

MarketAxess’ total trading volume for the second quarter declined 8.3% year over year and 17% sequentially. This was due to lower bond trading. There was a ramp-down in overall credit market activity from last-year levels due to economic disturbance caused by the pandemic. This took a toll on its commission revenues, which fell 9.1% year over year for the second quarter.

The company’s bond trading business thrives when credit spread volatility increases. Last year, credit spread volatility was greater than this year and credit spreads in high-grade bonds were also wider. Credit-spread widening means more riskiness in the market, which is when bonds look more attractive. Last year, it witnessed huge debt issuance by corporates. These factors led to higher bond trading, which in turn aided volumes, revenues and earnings growth of the company.

MarketAxess is credited with revolutionizing the traditional method of bond trading by introducing automated trades. The bond trading market lagged other fellow equity currency and trading markets in terms of adopting electronic trades. Even now, most of the trading for bonds is done and settled on phone calls.

The company’s founder Richard McVey spotted an opportunity early on to make bond markets efficient by automating the bond trading system. Via its automated trading platform, it allows bonds to be traded electronically. The company is the leading electronic trading network for the institutional market of U.S. credit products. It is also rapidly expanding outside the country and has businesses in Europe, U.K., and Singapore. It is also investing in the Asia-Pacific region.

This global expansion provides the company with ample room to grow in the $100-TRILLION global fixed income market, which is awaiting electronic transformation.

MarketAxess’ various acquisitions complemented organic growth. The buyout of Liquidity Edge provided the company with an attractive entry point to the U.S. bond Treasury market. The MuniBrokers takeover expanded MarketAxess’ existing municipal bond trading solutions for global institutional investors and dealer clients. The purchase of Regulatory Reporting Hub extended the company’s post-trade reporting, and pre-and post-trade data services across a broader European client base, particularly in Germany, France, and the Nordics.

The company’s advancement with core products, superior financial model, large and increasing addressable market, significant operating leverage along with an expanded suite of electronic trading protocols poise it for long-term growth.   

MarketAxess’ long-haul prospects look good, with the right product line in place to provide the much-needed solutions for credit markets. Yet, contraction in trading volumes might put earnings under pressure, which in turn could drag the stock.

Other stocks in the same space including Tradeweb Markets Inc. TW, CME Group Inc. CME, and Cboe Global Markets, Inc. CBOE have gained 40%, 9.5%, and 34.4%, respectively, over the same time period.

From a valuation perspective, the stock looks overpriced. Its forward 12-month price-to-earnings ratio of 51.1 is way higher than the S&P 500’s 26.51. The same is also above the five-year median of 46.86.

Thus, until the company’s business volumes gain strength, we should steer clear of the stock. It currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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