Flow Traders N.V.
Research by ALPHA
Author: Alpha
- 22.08 +4.84% (20/12/2024)
- 22.50 +6.84% (13/12/2024)
- HOLD
Flow Traders is an investment into ETP growth and market turmoil. The company is doing well when volumes and volatility peak (like in Aug'24). After a €17 low the share price climbed to €21 in October benefiting from increased volatility.
In November the VIX dropped significantly (after the election of Trump) to below 15. Market's sentiment about the (US) economy is currently positive. In this market the annual earning should land around €2,50/share in 2024 and the share price has little upside potential.
Flow Traders is however a long term hold as an insurance and for its venture assets.
Valuation (2)
Geo politics
Several areas of geo-political tension and conflicts, and direct military conflicts exist. These are potential triggers for increased market volatility.
Also other political events, with the change of leadership in the US, may cause market unrest. There are concerns about specific policy changes and US government spending/debt. However the market in general has a positive view on the effect of a change in leadership in the US.
During the previous Trump presidency (2016-2020) market volatility was low.
01Q2-24 Sell-off
The Q2-24 result with €0,30 earnings per share and a changed dividend policy caused a sell-off with >20% drop in price. The market correction in Aug'24 changed the view on Flow Trader's valuation. This triggered a quick recovery.
The cancelled dividend most likely reduces the short-term upside potential.
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Business (3)
Platform moat
This Dutch company is a leading global liquidity provider in exchange traded products. They provide liquidity in all major markets and exchanges 24 hours a day for all major asset classes; equity, bonds, currency, commodity and digital assets. Supporting both ON and OFF exchange trading. The trading platform and compliance with regulations are strong moat.
The board stopped dividends (Q2'24) to increase the trading capital, and generate more long-term value. Increased trading capital and share repurchases increase earnings per share.
01Exchange traded products
The global market for exchange traded product is growing as investors are attracted by the transparency of an increasing and diversified offering. Flow Traders benefits from this market trend and the growth in assets under management.
Blackrock estimates that passive investing through ETP will double by 2030.
01Venture capital
In 2022 the company founded Flow Traders Capital as venture capital unit. A €50 million fund (10% of EV) to actively invest in the development of financial markets infrastructure and the digital asset space with direct minority investments. The portfolio includes leading digital asset ventures such as; Elwood, Tonic, bloXroute, Ondo, AllianceDAO and D2X. Additionally, the ongoing strategic investments in MEMX, RFQ-Hub, LedgerEdge, ShapeQ and the Pyth Network are part of the Flow Traders Capital portfolio.
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Financial (1)
Balance sheet
Around €10B on the balance sheet are trading assets and liabilities. Similar to other financial institutions this is a risk for shareholder value when things go wrong. The company keeps a market neutral position at all time. Flow Traders has a proven track record with a prudent business and risk management approach. The non trading related balance sheet is healthy with a low debt ratio.
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Risks (2)
Market risk
The company provides liquidity and is hardly subject to market risk as it does not hold own positions. The results are often actually negatively correlated with the market performance. Flow Traders benefits from increased market risks, increased volatility and larger spreads. As an example of its prudent risk management approach; the company was not materially affected by the collapse of FTX in November 2022.
Even-though the company operates in high risk markets its market risk is considered immaterial.
01Human and/or technical failure
Trading has the reputation as an activity with risks for incidents that can have a major impact on the business and/or company value. Flow Traders has been prudent and there have been no incidents that impacted shareholder value.
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