MarketAxess: August Volume Report Shows Strong YoY Growth, Market Share Declines

Reiteration of hold rating given continued market share trends

As outlined in my introductory post on MarketAxess Holdings Inc. (NASDAQ:MKTX), “MarketAxess: Electronic Lending Platform With Industry Winds, Valuation Looks Right”, MarketAxess is a dominant player in global electronic credit trading space. The Company has benefited, and should continue to benefit, from the structural change in the global credit markets from primarily a dealer market to a customer market operated by telephone to an electronically traded market. As such, I continue to believe MKTX deserves a premium valuation to other electronic exchanges (such as CBOE, CME, ICE and NDAQ, all trading at 22-26x NTM EPS). However, given MKTX’s more recent deterioration in US High Grade and US High Yield credit market share, I believe the current valuation at 33x NTM EPS is justified and reiterate my HOLD rating on MKTX stock.

MKTX reports August volume and market share figures; ADV Strong Up Y/Y; Market share continues to decline, although the rate of decline shows signs of slowing

On September 5, MKTX reported volume and market share figures for August 2024. ADNV Total Credit was $13.3 billion (+27% Y/Y, +4% M/L) and ADNV Total Rates reached USD 28.4 billion (+46% Y/Y, +27% M/M). In terms of credit breakdown, US High Yield reached $6.7 billion (+34% Y/Y, +10% L/M), US High Yield reached $1.2 billion (+7 % Y/Y, +14% L/M), EM credit came in at USD 3.2 billion (+26% Y/Y, +1% L/M), Eurobond Credit reached USD 1.5 billion ( +19% Y/Y, -19% Y/M) and US government bonds came in at $27.3 billion (+43% Y/Y, +28% Y/M). In terms of market share for MKTX’s two key credit products, US High Yield market share was reported at approximately 19.9% ​​(-69bps Y/Y, +139bps M/M), and US High Yield market share was reported at an estimated 14.4% (-144bps Y/Y, +187bps M/M). While the market share trends for these two credit products continued to decline y/y, there was a slight improvement from what MKTX reported in July as USHG’s July market share declined by 134 bps y/y and USHY’s credit market share fell by 457 bps. Y/Y.

Prospective revenues/EPS for 3Q24; Revenue from forecasting commissions increased by 12% y/y

In addition to the ADNV report, MKTX also provided commentary on the estimated commission per million in August for credit and installments. MKTX noted that credit charge per million was $154 in August, up from $143 reported in July, which MKTX attributed to the higher duration of bonds traded, and noted that charge per million for installments used to be $4.00, roughly in line with $3.99. reported for July. Based on QTD volume and fee per million trends and my forecast for September, we estimate that 3Q24 fee income could grow 12% y/y to $168m (-2% q/q). Given all my other revenue and expense assumptions for the quarter, we estimate 3Q24 EPS of $1.68 (+15% Y/Y), compared to the current consensus of $1.65.

Risks to the thesis

The key risks to my thesis include: 1) market share trends – this could play out in two ways, either market share continues to come under pressure, which would lower the MKTX multiple further, or market share s -could recover, leading to multiple expansion, 2) if management does not continue to manage expenses well, this could lead to further pressure on margins on the line, 3) if long-term trends of electrification of markets with fixed income are faltering, this would lead to less benefit from the tailwind that MKTX has enjoyed. for over years.

Conclusion

MKTX is a strong player in the electronic credit trading space. The business has produced solid long-term results, but the recent slowdown in market share growth is giving me pause at the moment. I think there is potential for MKTX to be acquired further, which should warrant a multiple premium. I think the long-term trends in the industry remain solid, but I expect a more significant turn in market share trends to become more constructive on the stock market.