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Virtu Financial DD ($VIRT)

**Virtu Financial DD:**

Virtu Financial **(VIRT)** is a publicly traded Market-Making (MM) firm. Yes, I know owning a market making firm seems like a risky idea; however, I am about to lay out the **Bull Case** for owning this company.

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**Bull Case:**

**LongTerm Thesis:**

In order to start the Bull case I want to discuss a well known company that recently IPO’d… You may have guess it, this company is Robinhood **(HOOD)**. Robinhood is a brokerage that makes its money buy selling its customers orderflow. Who is buying this order flow? You guessed it, MM firms! In the last quarter we can see that Virtu Financial made $575M from their Market Making business, that is after the payment for order flow!

[MM Net Income](https://preview.redd.it/sqdxuo0ct6f71.png?width=811&format=png&auto=webp&s=d8b26f3b7a4dc1d254a70d0693209dfa559a9138)

To see the breakdown we can look at the next table.

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[MM Income Breakdown](https://preview.redd.it/a93cd02ft6f71.png?width=813&format=png&auto=webp&s=e447a22d9328f9666745c00708e7e6e8b3646b96)

Virtu generated $801M in MM revenue and paid only $223M for the order-flow to the brokerages, ex. Robinhood. This is a **gross margin** of **72.2%** on the MM business. That means for every $1 VIRT pays to a brokerage, they are able to make $3.59, or $2.59 in profits! Not to mention this profitability scales as Robinhood and other brokerages grow meanwhile, VIRT doesn’t have to pay a penny for the customer acquisition costs!

This is one reason why Virtu had a revenue of $1,073M last quarter, HOOD only had a revenue of $522M. While Virtu has 2x HOOD’s revenue, has a more profitable business, and has less expense to grow revenue/customer base, HOOD’s MC is ~$38B to VIRT’s ~$5B.

Virtu’s P/E is always fluctuating as market volume is the key indicator to VIRT’s revenue but I believe we have entered a new market trend where active management is here to stay. New traders and investors are obsessed with the markets and love to buy and sell positions with a much shorter holding period than historically. This may be due to the gamification of trading apps, or a plethora of other reasons but all that matters is the trend of average volume increasing across the broader market.

Jumping back, you may have noticed the spotty revenue figures seen in Q3 and Q4 2020, why is this? Well Q1 and Q2 of 2020 had very high volumes due to the Covid-19 crash and following rebound. This is another great reason to own the stock, let me explain. VIRT literally makes way more money when the market crashes because volumes spike during the panic. That means VIRT is not correlated to the overall market and actually has a %-year Beta of -0.29.

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[5-year Beta](https://preview.redd.it/ggyphr2st6f71.png?width=431&format=png&auto=webp&s=97b9b6970900eba7ac8e6bcd04eac3601bd33d20)

When the market crashes, VIRT benefits therefore the shares can be sold, and used to buy other companies at very cheap valuations!

**Short Term Thesis:**

During Q1 2021 meme-stocks were all over the news. Gamestop made incels and plebs into multi-millionaires which drew in mass amounts of volume into the markets chasing similar returns. Due to this unexpected volume VIRT EPS beat by 63% (Actual: $2.04 vs Expected: $1.25). This meme-stock craze has continued in Q2 2020 with AMC, CLOV, BB, SPCE, just to name a few. (Just pull up the charts and look at June volumes, too many charts to attach)

Personally, I expect EPS to be below Q1 as total market volumes decreased by approx 25% Q2 2021 than Q1 2021, as seen below.

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[2021 Q2 Market Volume](https://preview.redd.it/5lj1v6yht6f71.png?width=1040&format=png&auto=webp&s=cd90334c4ecf1d4063f0eb60c440dae24c5aaa8e)

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However, I still believe VIRT will easily beat the expected EPS of $0.81.

**Q2 2021 earnings call is Before Market Open tomorrow Aug 4th, 2021.**

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**Share Repurchases:**

Virtu Financial has been aggressively buying back shares as they are currently trading at a ttm P/E of 4.91. (Not using Forward P/E cause earnings estimates have been proven to be inaccurate) Virtu started repurchasing shares in Q4 2020 purchasing 1.4M shares (0.7% of float), 2.3M shares in Q1 2021 (1.2% of float), and 1.6M shares in first 2-months of Q2 2021 (0.8% of float).

Since the last earnings on May 4th, 2021 the share price traded from ~$28/share upto $32/share and has recently fallen to $25/share allowing for buyback to continue at these low levels.

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**Technicals:**

1. Daily RSI is currently at 37.
2. MACD has reversed and is forming a bullish pattern.
3. Share price is pushing up against the 20-day SMA.
4. August 20th (and others) options are merely 40% IV pricing in a very low expected move.

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**Concerns:**

* SEC is investigating payment-for-order-flow, which is key to this business.

Counter: CEO of Virtu has been on many media calls where he explains that as an MM they are actually creating price improvement on market-orders which would actually be executed at higher prices if they didn’t exist as an MM.

[https://www.youtube.com/watch?v=Q474x33a25w](https://www.youtube.com/watch?v=Q474x33a25w) (start at 3:00 for price improvement discussion)

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* As re-opening continues, new traders will have less time to focus on active management.

Counter: Human nature makes habits very difficult to break.

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* Market-making is so profitable currently that competition will eat away profitability.

Counter: Existing relationships with brokerages.

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**Positions:**

[Positions](https://preview.redd.it/pkz1lbdvt6f71.png?width=516&format=png&auto=webp&s=847b1aee727c302102358c9b573d86133697e4c0)

**TLDR:** Meme stocks have continued into Q2 2021 with high volumes. Virtu Financial **(VIRT)** is an MM-firm which benefits from high-volumes, and growth of active investing without customer acquisition costs. VIRT has recently fallen due to a SEC investigation which lacks any evidence of wrong-doing to retail investors. Share repurchases are accelerating. Option chain is very mispriced, IV ~40%.

What do you think?

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