Buy this undervalued stock before everyone else
Iit’s not often that you can point to a stock with a valuation around twice the broadest S&P 500 Index and call it undervalued. It makes more sense when the company has increased revenue and profits by 300% and 527%, respectively, over the past decade. Factor in a 1,900% gain in the share price over that time frame, and you might start to call it downright cheap.
Axess Market (NASDAQ: MKTX) is the company that posted these numbers and seems to have a long way to go. Despite this, the stock is trading at the same multiple as in recent years. Investors who pay attention to the story can see that this could be a recipe for more massive returns over the next five years and beyond.
Image source: Getty Images.
A cheap assessment
The smartest investors accept that big companies appear expensive. It is important to go further and show why.
When a business grows rapidly over a long period of time, it can often end up producing profits that are difficult to explain with traditional measures like a price / earnings (P / E) ratio. This is even true for valuation multiples which are spread over one year. MarketAxess is a prime example of how this dynamic can play out over the long term.
|End of year||P / E ratio||Five-year forward PER ratio||Five-year equity returns|
|2020||56||N / A||430%|
|2005||39||ten||N / A|
Data source: MarketAxess. N / A = not applicable.
Over the past decade, investors with the ability to take a longer view have made huge gains. The company was constantly increasing its profits fast enough to make the existing multiples less relevant. Although the current P / E is 56, MarketAxess increased its revenue and profits by 35% and 46%, respectively, last year. This could justify the price, and then some.
Analysts consensus is that earnings will only increase 2% this year. Even if it is true, it seems unlikely that it will last.
Why growth will continue
Management has managed to increase revenue by almost 17% per year over the past decade, and there is good reason for that. The company operates an electronic bond trading platform that replaces the outdated telephone price settlement system.
While relationships are important in the fixed income market, price transparency and costs trump everything. The company’s platform keeps its promises. It allows buyers and sellers to find themselves at a cost of 10 to 30% less, depending on the resellers.
As the volume on the platform increased, much of the additional revenue fell to the bottom line. After all, once the platform is up and running, it doesn’t require a lot of additional investment. This has resulted in profitability above the levels enjoyed by another dominant platform – Facebook.
MKTX profit margin data by YCharts.
What to watch
To stay confident in the pursuit of growth, investors will want to keep an eye on two things: market share and expansion. As more of the bond market turns to e-commerce, the company is expected to continue to see its share of high-quality, high-yield bonds increase. Compared to the first quarter of last year, management reported equity gains in both categories in its latest earnings call.
|Bond category||Q1 2021||Q1 2020|
|High quality US||20.5%||20%|
|US High Yield||15.6%||12.2%|
Data source: MarketAxess.
In addition to growth in the United States, MarketAxess is experiencing robust growth internationally. The company’s more than 900 customers increased their volume by 18% year-on-year in the first quarter of 2021. Asia-Pacific was a bright spot, growing 57%.
Another area of expansion has been the municipal bond trade. These securities issued by state and local governments to finance public projects represent a market of $ 4 trillion. Although e-commerce only accounted for 9% of volume in 2019, that number was up from 6% in 2017. The company’s commerce in this category grew by 75% year-over-year in the past. during the first trimester.
A crystal ball
Only time will tell if the combination of growth and a huge market opportunity will result in above-market returns. The company faces more competition than it did a decade ago, and logic suggests that every percentage of market share it gains will become more difficult over time.
That said, the stock sits at the same seemingly high valuation as it did five and 10 years ago. Investors who bought and held stocks have been rewarded with life-changing returns. The situation looks very similar today.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of its CEO, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. Jason Hawthorne owns shares of MarketAxess Holdings. The Motley Fool owns shares and recommends Facebook and MarketAxess Holdings. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.