MarketAxess Holdings (NASDAQ:MKTX) isn't exactly a household name, but this is one financial services business that should be on investors' radar. In this Fool Live video clip, recorded on March 25, Fool.com contributor Brian Feroldi discusses why this is such an incredible business and why it still has lots of room to grow.
Brian Feroldi: So, the company is called MarketAxess. The ticker symbol is MKTX. This is not a company that you are going to interact with in your daily life. In fact, it only has a few thousand customers globally, but this is really an incredible business. If you look at the company's stock performance since it came public in 2005, you're talking about a 27-bagger and counting. You're going to understand why in a little bit, but this is just been a phenomenally successful company, phenomenally successful.
What do they do? This is the largest electronic fixed-income trading platform in the world. Everybody here buys and sells stocks online. It would be crazy for us to call up a broker or to call somebody 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, that's how the bond market works. Most bond market trading that happens, happens over email or by text message, or by simple communication where if you want to buy or sell a bond, most of it happens off-platform. It's been like this way for decades, for centuries. In the year 2000, there was a trader that was at J.P. Morgan. He saw this and said, "This is crazy. If stock trading is going online, why shouldn't bond trading, fixed income trading go online?" In a J.P. Morgan incubator, he founded MarketAxess and it basically takes all of the benefits of trading online and brings that to the bond market.
There's a lot of advantages. Liquidity is higher, transparency is there, it's easier to track data aggregation. There are huge advantages to trading and buying and selling online versus the old fashioned way. This company launched in 2000 and overtime, it has steadily added on new products to its platform and it has just steadily attracted new customers. I think a big reason why is because they had the backing of a lot of big financial institutions in the beginning, especially J. P. Morgan. The company has consistently added new products, expanded geographically, added new customers, and it has become the largest electronic fixed income trading platform in the world.
Their market position really benefits them because marketplaces have natural network effects. If you are interested in trading bonds online, which platform do you want to go to? The one with the most market participants. You're going to get the most selection and the most liquidity. The exact same thing, if you want to sell. MarketAxess has over 1,800 institutional level investors and dealers on its platform worldwide, and every year, it adds more customers to it. It convinces them, each of its customers, to devote more of their fixed-income trading to the platform and it launches new products and services.
It started with the U.S. high-yield market, it added the European market, it added emerging market bonds to that, and it sees potentials to add CDs and leverage loans over time. Because of its position and because of the advantages the platform offers, this company's revenue has grown like clockwork. It's just been extremely consistent, dependable grower. What's even more interesting is this company's margins are basically Mastercard level. Its gross margin is 77% and its net margin, after all costs are taken out including taxes, is 43%. It keeps $0.43 on every dollar in sales. That is a ridiculously high number. This company is extremely scalable and extremely high-margin.
Over time, while it's certainly the biggest player in the market, the company still sees big growth potential from where it is today. It has about 1,800 total market participants, and a lot of that is still concentrated in its core market. It's going to be expanding internationally. It basically says that about $67 billion in fixed income credit products are traded every day. On its platform, it's only doing about $9-$10 billion. This was as of September. It still seems huge room for it to grow and it points out every 1% market share that it gets, it gets an additional $33-$35 million in revenue.
Because this is all fixed-cost business, all that additional revenue is basically turned into profit. This is an extremely compelling business. Now on the valuation side, the business is super high-quality, so it's also very expensive. The company trades at about 29 times sales and about 63 times earnings. The business is hyper-optimized for profits. That is a real P/E ratio. This is an expensive company. But if there is a business that deserves to be expensive, it's MarketAxess.
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