MarketAxess Declines 20.4% in 3 Months: Hold, Sell or Buy the Dip?

Performance Overview - MarketAxess Holdings Inc. (MKTX) shares have declined by 20.4% over the past three months, significantly underperforming the industry, which saw a decline of 3% [1] - In comparison, CME Group Inc. (CME) experienced a gain of 2.5%, while Cboe Global Markets, Inc. (CBOE) fell by 7.4% during the same period [1] - The S&P 500 index rose by 3%, indicating a stark divergence in performance [1] - MKTX is currently trading below its 50-day and 200-day moving averages, suggesting downward momentum [1] Key Challenges - MKTX reported growth in total credit average daily trading volume for Q4 2024, but this was offset by significant declines in key segments [5] - U.S. high-yield trading activity fell by 18.7% year over year in Q4 2024, with a market share drop of 380 basis points [5] - U.S. high-grade trading activity increased by 4% year over year, but its market share decreased by 250 basis points [5] - A shift towards large block trading may be contributing to the decline in market share [5] - Transaction fees per million for total credit fell by 3.8% year over year in Q4 2024 due to product mix, despite higher trading volumes in certain areas [6] Financial Performance - Total expenses for MKTX rose by 8.2%, 11.8%, and 11.5% year over year in 2022, 2023, and the first nine months of 2024, respectively [6] - Management expects 2024 expenses, including the Pragma acquisition, to be near the low end of the previously provided range of $480 million to$500 million [7] Valuation Insights - MKTX appears relatively expensive from a valuation perspective, which may limit short-term gains [8] - The company's shares are trading at a forward price/earnings ratio of 26.62X, higher than the industry average of 22.4X [8] - Other industry players like CME Group and Cboe Global Markets are priced at 21.85X and 20.81X price/earnings, respectively [9] Growth Drivers - MKTX has consistently benefited from solid trading volumes, which are the primary driver of its revenues [10] - In the first nine months of 2024, commissions advanced by 9% year over year, supported by an average daily trading volume of 35.8 billion [10] - The company leverages acquisitions and partnerships to enhance its product portfolio and expand its footprint in fixed-income trading [11] - A strategic data partnership with S&P Global Market Intelligence was established in October 2024 to increase transparency and efficiency in fixed-income markets [11] - MKTX's Open Trading platform contributed to a credit volume of 782.2 billion, improving by 10.7% from the prior-year period [12] - As of September 30, 2024, MKTX had cash and cash equivalents of $446.3 million and generated$209 million in net cash from operations, an increase of 8.8% from the prior-year period [13] Earnings Estimates - The Zacks Consensus Estimate for MKTX's 2024 earnings is $7.38 per share, indicating growth of 7.7$8.21 per share [15] - MKTX's earnings have outpaced estimates in the trailing four quarters, with an average surprise of 4.2% [16] Conclusion - Despite facing short-term challenges such as declining market share, falling transaction fees, and rising expenses, MKTX's robust trading volumes, strategic partnerships, and strong financial position highlight its potential for long-term growth [17] - However, the company's higher valuation compared to the industry average suggests it may not be an opportune time to buy the stock [17]