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After a strong three year run that has seen Virtu Financial return very close to 3x for shareholders, valuation checks still point to the stock trading below an estimate of its intrinsic value. Both the Excess Returns model and the earnings based multiples suggest the current US$67.93 share price may sit at a discount rather than a premium.
Over the past three years, Virtu Financial has returned about 293.8%. This puts extra focus on whether the current valuation still leaves room for further upside or mainly reflects past gains.
The launch of Virtu Financial’s advanced notional order tool for 10b-18 corporate buybacks can support expectations for future trading related revenue. At the same time, concerns about revenue cyclicality and competitive pressure may limit how much investors are willing to pay for that potential.
Virtu Financial scores 5 out of 6 on our broader valuation checks. This means the stock screens as undervalued across most measures on the valuation summary.
The issue now is whether Virtu Financial’s recent rerating has already captured the key upside suggested by intrinsic value estimates or if investors are still paying less than the underlying business is worth.
The Excess Returns model looks at how much profit Virtu Financial can earn on its equity after covering the required cost of capital. In this framework, Virtu Financial is assumed to generate stable earnings of $7.16 per share on a stable book value base of $20.80 to $21.17 per share, supported by an average Return on Equity of 34.44%. After subtracting a $2.04 per share cost of equity, the model arrives at excess returns of $5.13 per share, which are then projected forward and discounted.
Those excess returns translate into an estimated intrinsic value of $104.87 per share, compared with the current $67.93 share price. This implies the stock is 35.2% undervalued on this method. The launch of Virtu Financial’s advanced notional order tool for 10b-18 corporate buybacks helps explain why some investors are willing to ascribe value to its ability to keep generating these excess returns, even as concerns about revenue cyclicality remain.
On the Excess Returns model, Virtu Financial currently screens as undervalued relative to its estimated intrinsic worth.
Does Virtu Financial Look Undervalued on Earnings?
P/E fits Virtu Financial well because the business is currently profitable and analysts can anchor valuation to actual earnings per share. On this measure, Virtu Financial trades at about 11.6x earnings, compared with an industry average P/E of roughly 38.6x for Capital Markets stocks and a peer group average near 31.8x. That is a sizeable gap even before adjusting for company specific traits.
The fair P/E ratio that blends the company’s profile with sector and risk factors is estimated at about 17.0x. Relative to this benchmark, Virtu Financial’s current 11.6x multiple suggests the stock is pricing in a large discount compared with what this framework suggests investors might typically pay for its earnings. The recent rollout of the notional order tool for 10b-18 buybacks has supported interest in the stock. Even so, the P/E still places Virtu Financial below both the industry and this tailored fair value marker.
On the P/E multiple, Virtu Financial shares appear undervalued relative to what investors might usually pay for this level of earnings.
The Virtu Financial Narrative: What Would Justify Today’s Price?
Simply Wall St Narratives for Virtu Financial pick up where this valuation puzzle leaves off and explain what assumptions about Virtu Financial’s future growth, margins and earnings would need to hold for the stock to be worth materially more or less than today’s price on the Community page. Each narrative connects its number to a clear view on how growth, profitability and risk could evolve, which you can revisit as new information on Virtu Financial becomes available.
One of the top community narratives on Virtu Financial: roughly fairly valued
“Recent research on Virtu Financial shows a mix of optimism and caution, with price targets adjusted both higher and lower as analysts refine models around compensation, financing, and trading volumes…”
For Virtu Financial, both the Excess Returns intrinsic value estimate and the earnings multiple view currently point in the same direction and suggest the stock screens as undervalued. The key question is whether the business can keep earning at levels that support that intrinsic value assumption while the P/E gradually converges toward its tailored fair ratio. The launch of the notional order tool helps the positive case, while concerns about revenue cyclicality and competition sit on the other side. The crux from here is whether that discount reflects genuine mispricing or is simply compensation for those risks.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
