Early in 2023, I called shares of Tradeweb Markets Inc. (NASDAQ:TW) a quality name, trading at a price which reflected these qualities. The company has proven to be a stable grower, and subsequently has been awarded premium valuations over time, as I failed to see appeal early last year when shares were trading in the $70s.
A year later, shares broke the $100 mark as the company has seen strong momentum of its own, interest rates have fallen, and the business has made a nice bolt-on deal here. All this makes me upbeat here from a business perspective, if not for the steep valuations commanded by the business, for what historically have been the right reasons.
A Trading Platform
Founded in 1996, Tradeweb was designed to develop better electronic marketplaces. Over time, the company has evolved to facilitate trading on a range of products through electronic platforms, including assets like interest rates, credit, money market funds and equity products. Typical clients include large banks, (other) financial institutions, and even central banks. As of today, the business comprises over a 1,000 in staff providing over 50 products to some 2,500 clients, facilitating over 100,000 trades per day.
The business was long part of Refinitiv (which in itself was part of Thomson Reuters). After Blackstone acquired Refinitiv from Thomson Reuters, it brought Tradeweb public in the spring of 2019.
Shares were sold to the public at $27 per share, and after shares rose to the $35 mark on the first day of trading, the company was granted a $7.5 billion equity valuation. This resulted in a steep 11 times sales multiple, with revenues reported at $648 million, yet this was supported by steep margins and 20% growth on the top line.
Fast forwarding to early 2023, the company has seen continued growth, but earnings power of $1.90 per share resulted in a rather steep valuations (even if we factor in a substantial net cash position). Trading at an earnings multiple in the 30s, I failed to see immediate appeal.
Unleashed, Again
Shares of Tradeweb traded around the $65 mark over the summer of last year, but ever since have seen massive momentum, as shares broke the $100 mark early this year, now trading at $102 per share (after trading as high as $108 per share recently).
The reason for that momentum is easily understood, as the market predicates the great long-term growth story of Tradeweb. From a mere half a billion revenue base in 2016, the company has grown and broke the billion mark in 2021, with revenues reported up more than 12% to $1.34 billion in 2023. More important is that EBITDA margins over time have doubled, having risen to more than 50% of sales.
In February of this year, Tradeweb posted its 2023 results and while full-year revenues were up 12%, it were fourth quarter revenues which were up as much as 26%! The company posted operating profits of $505 million for the year, with profit growth exceeding topline sales growth, as earnings of $365 million came in at $1.71 per share based. Adjusted earnings were reported at $2.26 per share, as, quite frankly, the reconciliation from the GAAP earnings looks quite clean.
With 237 million shares outstanding, after incorporating some LLC interest as well, the company commands a $24 billion equity valuation, which actually includes a $1.7 billion net cash position here. Adjusted for this, an enterprise valuation of $22 billion and change, results in a nosebleed 17 times sales multiple and around a 50 times earnings multiple.
Putting Cash To Work
Early in April 2024, Tradeweb announced that it has reached a deal to acquire Institutional Cash Distributors (“ICD”) in a $785 million deal. ICD is a provider of institutional investment technology for corporate treasury organizations.
Founded in 2003, the company provides these services to more than 5,000 organizations with average daily balances of $230 billion. The idea is to grow the presence of Tradeweb in this market area, while the business looks to deliver on cross-sell synergies as well.
The deal presentation reveals that ICD generated some $85 million in revenues in 2023, suggesting that about a 9 times sales multiple has been paid, marking a big discount compared to its own valuation. In fact, the deal value is equal to about 3.5% of the own valuation, while the sales contribution surpasses 6%.
The company has delivered on double-digit revenue growth, with EBITDA margins seen topping 50% in year two, as all of this looks quite consistent with Tradeweb´s performance itself.
And Now?
The latest Tradeweb Markets Inc. deal with deplete the net cash position to around a billion, equivalent to about $4 per share. This means that current earnings power of $2 and change will see a small uplift from the deal (albeit that some net interest income will be forfeited as well).
Amidst all this, earnings multiples remain quite demanding, a bit too demanding to see appeal, even as the deal looks (relatively) cheap. Nonetheless, the long-term promise remains, amidst a solid 2023, a compelling deal, but moreover the fact that average daily volumes for the first quarter were up an astonishing 39%!
The truth is that the Tradeweb Markets Inc. business is still heavily tied to the fortune of the bond markets, as a growing bond market and active interest rate debates really drive momentum in the business. Moreover, the latest deal is relatively attractive, as the company furthermore holds a substantial net cash position here.
Amidst all of this, there are many reasons to be upbeat about the business, if not for the valuation multiple, which have historically been expensive, for good reasons as became apparent with the passage of time. This is all quite positive, but given the momentum displayed by the shares, a 40-50 times earnings multiple seems steep.
At the same time it should be a reminder that if the premium valuations narrow to more reasonable (but still expensive 30 times earnings), as happened at various instances in the past, it might serve as a great opportunity to get involved with Tradeweb Markets Inc. shares.
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