Reducing Our Fair Value Estimate for MarketAxess by 13% as Trading Market Share Disappoints

Following a string of weak trading volume reports, we are reducing our fair value estimate for MarketAxess MKTX to $305 from $350, which is 44 times our 2023 earnings estimate.

The bulk of the decrease comes from lower trading volume growth projections for U.S. corporate bonds. While electronic fixed income trading has continued to grow, creating a tailwind for the bond trading networks, MarketAxess’ market share in the electronic portion of the investment-grade bond market has fallen. We now anticipate its share of the electronically traded U.S. corporate bond market will decline in 2023 and 2024 before becoming stagnant with Tradeweb and Trumid combined taking more than 50% of the electronic investment-grade market.

We still expect MarketAxess to remain the leader in U.S. high-yield fixed income, but the company faces pressure here as well. The company’s rolling three-month average market share has fallen to 16.3% of total high-yield bond trading, down from its all-time highs of around 21% at the end of 2022. That said, market share figures can be volatile month to month, and even with the recent decline the company is still ahead of where it started 2021. We generally believe that investors should take a long-term view when looking at trading volume data, but there are clear signs that the success of MarketAxess’ peers has become a headwind to growth.

MarketAxess’ revenue growth should still mostly come from higher trading volume. That said, we expect the weak capture rates on investment-grade bond trading seen in 2023 to normalize over time. MarketAxess’ pricing structure for investment-grade bonds includes lower fees for lower-duration bonds, and higher yields have pushed down the average duration of bonds trading on the firm’s platform. We do not see the lower pricing as the result of competitive pressure, and if rates decline faster than anticipated, we would expect MarketAxess’ medium-term revenue growth to be front-loaded as pricing recovers.