Shares of trading products provider Virtu Financial Inc. (VIRT, Financial) have gained more than 40% since November. Virtu's primary business is to provide financial liquidity to markets and exchanges.
The company has a high-frequency trading platform that allows it to trade high volumes of stocks, commodities, currencies and bonds, among other instruments. It profits from the difference between the buy and sell prices.
Therefore, given the level of volatility in the market, the company's rally could continue through 2021. At the current price of $30.60 per share, the stock is valued at a trailing price-earnings ratio of 5.93. This is several levels below the Peter Lynch fair value of 15.
However, Virtu's forward price-earnings ratio of 11.42 suggests that earnings per share are expected to decline in the next 12 months. This could be tied to expectations that global markets will resume normality soon, thereby reducing volatility. Low volatility reduces Virtu's potential to make more profits from price swings.
Nonetheless, even with a forward price-earnings ratio of 11.42, it is still below the Peter Lynch fair valuation, which suggests there may still be room left to run going into the second quarter of the year.
The business of market-making attracts competition from all corners of the market. Virtu's competition primarily stems from the private sector, where small players have created products to target specific segments of the market. Some of them, like Australia-based Axi, have taken a more direct approach to the market by incorporating services that are meant to make customers enjoy their trading experience. You can read AxiTrader review for more on these features.
In the public domain, players like Interactive Brokers Group Inc. (IBKR, Financial) and Evercore Inc. (EVR, Financial) will also be looking to add to their market share as more investors embrace modern trading technologies.
Virtu looks relatively undervalued compared to the two companies, but this could also turn out to be a value trap if earnings start to fall as predicted over the next 12 months.
In summary, shares of Virtu appear to have recently pulled back after a long bull run. The company trades at a lucrative trailing price-earnings ratio of 5.93. However, its forward earnings multiple suggests that earnings could start to fall in the next 12 months, dimming its appeal.
This could be a decent short-term buy, but traders may need to keep a close eye on the bottom line.
Disclosure: No positions in the stocks mentioned.
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