Flow Traders N.V.
Research
Buy by Alpha (07/08/2024)
- 25.00 +38.43% by 05/08/2025
Flow Traders is a leading global liquidity provider in exchange traded products. This Dutch company operates globally with hubs in Europe, the US and APAC. It provides liquidity in all major markets and exchanges 24 hours a day for all major asset classes; equity, bonds, currency, commodity and digital assets.
Net Trading Income (NTI) is correlated to the volatility index (VIX). NTI was muted in recent years but is be expected to rise with recently increased volatility. The VIX reached a post-COVID peak above 60.
Flow Traders is an interesting investment case given the current market turmoil, geopolitical tensions and economic uncertainty. My estimate is €4-5 EPS for 2024 which values the company at around 4x earnings. Furthermore the company strategy aims for long-term shareholder value creation.
Valuation (1)
Q2-24 Sell-off
The Q2-24 result with €0,30 earnings per share triggered a sell-off with >20% drop in valuation. The changed market conditions in Aug'24 again changes the markets view on Flow Trader's valuation. Market turmoil should drive the share price higher in the coming weeks/months.
The changed dividend policy most likely reduces the short-term upside potential.
05/08/2024 by ALPHA｜01Business (3)
Exchange 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.
05/08/2024 by ALPHA｜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.
05/08/2024 by ALPHA｜01Platform moat
Flow Traders has a strong market positions and a global 24h coverage in all major financial centers. Supporting both ON and OFF exchange trading. The trading platform and compliance with regulations are strong moat.
The board recently stopped dividends to increase the trading capital, and generate more long-term value. I expect that share repurchase will continue to also increase earnings per share.
05/08/2024 by ALPHA｜01Financial (1)
Balance sheet
Around €10B of the balance sheet are trading assets and liabilities. Similar to other financial institutions this is a risk for shareholder value when things go wrong. But 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.
05/08/2024 by ALPHA｜01Risks (2)
Market risk
The company provides liquidity and is hardly subject to market risk as it does not hold own positions. It is actually negatively correlated with the market. 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.
05/08/2024 by ALPHA｜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.
05/08/2024 by ALPHA｜01