Market Commentary: 54.9% Upside + 9.3x P/E

Trading volume is like oxygen for market makers, and over the past decade off-exchange market makers like Virtu Financial have soaked up a lot of trades from individual investors, creating a fortune for shareholders.

Wholesale market makers, such as Citadel, process as much as a quarter of all stock trades. These are funneled from retail brokers, such as Robinhood Markets. But recent rules proposed by the SEC would migrate these trades back to standard exchanges. What does this mean for Virtu?

Key Points

• Virtu’s sales have been down in 3 of the past 4 years, but its operating income has been consistently positive.
• The company’s price-to-earnings ratio is under 10x, which makes it an attractive opportunity for value buyers.
• VIRT offers an attractive reward-to-risk ratio for risk-seeking buyers.

Forget the Top Line, This Is What Counts

Let’s start with the ugly, but we really think you will want to stick around for the good. Virtu sales have been down in 3 of the past 4 years. The last two years alone saw sales declines of 12.2% and 22.2% respectively.

Sounds pretty bad until you realize in 2020 they were up by 145.7%, so the declines were from a really high base.

But what makes Virtu worth exploring is not so much the top line as it is the bottom line.

And that’s where we move from the ugly to the good.

You see that year Virtu generated its big top line pop, it posted revenues of $2.9 billion, and reported operating income of $1.38 billion. Now that’s an attractive business model.

Indeed when we reviewed the returns for the past ten years, we couldn’t find more than one year where operating income was negative. Even when the top line has been choppy, the bottom line has been steadily in the black. Its combination of market making, algorithmic trading and prime brokerage services is clearly a hit with clients.

Is Virtu On Sale?

In spite of a good track record of profitability, Virtu share price has been hit with a proverbial missile. Over the past 5 years, it’s down 41%. In the last 12 months, it has declined by 30%. Year-to-date it’s close to flat, but still down 3% at the time of our research. The regulatory risk from government agencies has clearly weighed on the stock.

But at some point a deal is a deal, and we think Virtu might just be at that level. Here are some reasons why:

Firstly, management has repurchased close to a billion dollars worth of stock over the past few years, signaling confidence in the future prospects of the firm.

Secondly, the price-to-earnings ratio is under 10x. To be precise, it’s at 9.3x currently, making it a really appetizing opportunity for value buyers.

And thirdly, a valuation analysis puts fair value 54.9% higher at $31 per share.

Will Virtu Go Up?

The actions of the SEC are pivotal for Virtu and analysts seem to be respecting the magnitude of the risk greatly. The consensus estimate among 8 analysts is $21.56 per share, which is fractionally higher than where the share price currently sits.

If volume is going to be siphoned away from Virtu and Citadel back towards standard exchanges, certainly revenues are likely to take a hit and profits along with them.

For the risk-seeking buyer who is willing to run the gauntlet for a higher return, Virtu offers an attractive reward to risk ratio now.