Can Tradeweb Sustain Its Success?

Can Tradeweb Sustain Its Success?

After going public last Wednesday, Tradeweb Markets (NASDAQ:TW) has been on a roll. Bloomberg reported one week ago that Tradeweb had managed to raise $1.1 billion by selling 40 million shares at $27 apiece. Tradeweb then quickly jumped to over $34 on Thursday, and a week later closed trading this Wednesday at $40.26.

There are plenty of reasons why investors are so excited about Tradeweb, from its strong financial numbers to investor interest in electronic trading. But while Tradeweb is undisputedly a buy at $27, what about at $40? Here are some of the most important facts about this company and why investors are so heavily considering it.

Power Of Trading

Tradeweb is an electronic trading platform for financial markets which was founded in 1996. Its clients include hedge funds, insurance companies, and other large financial institutions Tradeweb helps facilitate trading across four asset classes: rates, credit, money markets, and equities. According to its SEC report, its 2018 trading volume was “over $549 billion across more than 40 products.”

Controlling a financial trading platform is highly profitable, and Tradeweb is the rare IPO which can report both solid revenue growth and profitability. Net revenue in 2018 was $657 million, up from $504 million in 2017 and a growth of 30%. Furthermore, Tradeweb recorded a net income of $159 million in 2018 compared to $83 million in 2017. Tradeweb also reports positive cash flow as well as $1.3 billion in total assets up against $283 million in total liabilities.

Tradeweb is thus already in a strong position, and it has plenty of opportunities for further growth. Financial institutions are more interested in electronic trading which allows for faster, transparent trades, and Tradeweb’s long history and current success places it in a position to keep innovating. Tradeweb will likely be looking at targets for future M&A, such as its 2016 acquisition of CodeStreet.

Potential Challenges

Tradeweb is a successful company with good financial numbers and growth prospects, and at its IPO price was a definite buy. But at this elevated price, investors have to start asking additional questions and acknowledge some of this company’s downsides.

The first concern is the structure of this IPO. Unfortunately, Tradeweb is going with the multiple class share model which is all too common with many IPOs these days. In fact, Tradeweb has four classes of shares, with Classes B and D having 10 votes while Classes A and C have one. Tradeweb’s IPO consisted of Class A shares. Tradeweb’s owner Refinitiv and its owner Blackstone (NYSE:BX) will thus retain total control of the company. Some investors may appreciate that Refinitiv will be staying to deliver a guiding hand, but this multiple class share model is not good for ordinary investors in general.

Furthermore, is Tradeweb overvalued at its current price? With a market cap of 8.9 billion at its new share price, Tradeweb is trading at about 38 times 2019 earnings estimates. Some analysts like Jim Cramer argue that would be a bargain, and compare Tradeweb to fellow electronic trading platform MarketAxess Holdings (NASDAQ:MKTX), which has a P/E ratio of 56. It should be pointed out that MarketAxess offers better margins, but it does show that Tradeweb does have further room to keep growing.

There are other risk factors as well, such as concerns about a U.S. economic slowdown on the horizon, competition from other electronic platforms like MarketAxess, and the threat of hacking or other technological issues. Still, these are relatively minor compared to other IPOs, and Tradeweb does not appear to be significantly overvalued even at its higher price.

Wait For Now

Buying Tradeweb right now is not a bad move, as there is reason to believe that the company can continue to grow over the long term. But it is not uncommon to see large IPOs perform well out of the gate, only to later fade once the hype wears off.

Investors will be better off avoiding Tradeweb for a few months or until the lock-up period expires as there is a solid choice that the company’s stock will fall then. Once the price becomes more reasonable, then I would strongly recommend picking this stock up for the long term. Whatever the concerns about Tradeweb’s valuation and initial instability with IPOs, this is a company with significant potential.