What's up guys and welcome back to wall street millennial today we're looking at a stock in the fintech industry that has tremendous growth potential and an insanely cheap valuation. Every time you place a trade on a retail brokerage such as robinhood market makers, skim a few pennies off the transaction. These transactions add up to billion dollars worth of profits for these companies, the more traders there are on wall street bets buying out the money options. Yolos, the more these market makers will profit.

Luckily, we found one stock that benefits from the wall street best degeneracy, as well as long-term secular growth trends in the fintech industry. Keep in mind that we are not financial advisors and this video is, for entertainment purposes, only make sure to do your own research and consult with a professional before making any investment decision. The stock we're talking about is virtue financial ticker, symbol, virt for full disclosure. I own shares of vertu.

This is a long-term holding and i don't have any plans on selling anytime soon. However, i can change my positions at any time. Virtue is one of the world's largest market makers and providers of electronic trading technology. They operate two business segments market making and electronic services in the market making segment.

They sit in between other market participants who want to buy or sell equities options, fixed income or commodities to each other. They make a few pennies off of each transaction every year. Virtue pays tens, or even hundreds of millions of dollars to retail brokerages in exchange for their order flow. This allows them to market make on tens or even hundreds of billions of dollars worth of retail orders.

They compete with the likes of citadel in market making their other segment, which is much more interesting, is execution services. They created a proprietary technology platform which helps large institutional investors, execute large trades. Large institutions such as mutual funds, often submit in giant orders, buying or selling billions of dollars worth of stock. If the mutual fund owns a billion dollars worth of a company that has a market cap of 10 billion dollars, they could single-handedly tank the entire price of the stock when they try to sell out of the position.

This is a major expense for all institutional investors and one of the major reasons why most of them underperformed their passive benchmarks, virtue leveraged their 13 years of market, making experience to make a comprehensive suite of solutions to help their clients get best execution on their trades. Their execution services have grown rapidly over the past few years. Currently, 41 of the top 50 largest financial institutions use virtue execution services they've also expanded internationally, serving over 2 000 clients. In more than 50 countries around the world, they've created an execution services ecosystem.

Where clients can use many virtue products, they can provide training, algorithms make markets for illiquid otc stocks, make impact models and market make for etf providers. They currently act as a market maker for more than 615 etfs. Technology is at the core of these services and they have created over 50 apis to integrate their solutions with other software tools. One of the most interesting things about virtue is its correlation with market volatility.

When the market is volatile, bid ask spreads increase which allows them to make more money in their market, making, division and, to a lesser extent, their execution services. As you can see, their stock price is positively correlated with the vix volatility index. In 2018, the market experienced a flash crash and vixx shot up. There is a tremendous boost to their business and their stock price nearly doubled.

Similarly, when the coveted pandemic struck in march of 2020, the vix shot up while the rest of the market was in free fall virtue, skyrocketed almost immediately. The fact that virtue stock goes up during market crashes is an extremely valuable feature. Diversification is one of the most important concepts in investing. You generally want to own as many stocks with low correlations to each other.

This reduces the risk of your overall portfolio. The problem is that during a market crash, stock, correlations increase and almost all stocks tank together. This is what makes virtue's counter-cyclical nature so valuable, they're one of the few stocks that actually benefits from extreme volatility and often rallies during crashes. The market making industry is highly competitive, so is difficult to grow quickly.

However, virtue's competitive position in the market is very strong. They've turned themselves into one of the world's leading market makers. In 2018, they acquired rival kcg holdings for 1.4 billion dollars. Kcg was already one of the biggest players before the business combination.

They also bought financial markets technology, firm investment technology group in 2018 for one billion dollars. This acquisition gave them the necessary technology to expand the execution services business. While the market making business, is the cash cow for the company and generates the majority of their profits and revenue, the execution services side is likely to be the engine of growth going forward they've spent years, developing world-class training technology and there's still plenty of room for Them to grow now, let's look at the financials for the full year of 2020 virtue made net profit attributable to common shareholders of 624 million dollars. As of july 16, 2021.

Their market cap was a little under five billion dollars, giving them a price to earnings ratio of eight times. That's an insanely low valuation for a fintech company. We made a dcf model to project their earnings. In 2020, they made 2.5 billion dollars of trading revenue, which is mostly from their market.

Making. Division 2020 was an especially good year because of the pandemic related volatility, while they're off to a good start with 802 million dollars of trading revenue in the first quarter of 2021. We will assume that this will moderate and they'll make 1.5 billion dollars for the full year. Given the highly competitive nature of the market making industry, we conservatively assume that trading revenue doesn't grow for the next five years.

Their commissions and technology revenue is mostly generated from their execution services. Division, which has strong growth potential going forward commissions and technology generated 601 million dollars of revenue in 2020. This was partially boosted by the high volumes during the volatile market conditions of 2020., we'll assume that they make 600 million dollars of revenue again in 2021 and grow at 10 per year. After that, the growth in the execution services division will bring revenue to an estimated 2.4 billion dollars in 2025..

This estimate is, if anything, conservative as it is still well below their 3.2 billion dollars of revenue in 2020.. We assume that they make a pre-tax profit margin of 30 in each of the next five years, which is pretty much in line with what they make in a normal year. We assume they pay an effective tax rate of 20 percent. It is important to note that roughly 42 of their net profit is attributable to non-controlling interest.

We must subtract this amount to get the net income attributable to common shareholders. We estimate net income attributable to common shareholders, will be 299 million dollars in 2021 and will increase to 338 million dollars by 2025.. In the first quarter of 2021, they had 123 million diluted shares outstanding. They recently authorized a 300 million share repurchase program.

We estimate that their common shares outstanding will decrease to 116 million they'll have an estimated 2.91 cents of earnings per share. In 2025, we apply a relatively low discount factor of six percent. The reason we assign such a low discount factor is because virtue stock can be used as a portfolio hedge. The stock price often goes up in market crashes, making it extremely valuable.

In a portfolio, we conservatively assign a two percent terminal growth rate, which is in line with inflation. This gives us a fair value of 53 dollars for the stock representing 103 upside from the current price. However, virtue stock is not without its risks when market volatility is low, their revenues and profits can dry up very quickly. This was the case in 2019, where they lost 52 cents per share.

A lot of this loss can be attributed to expenses that they incurred. Investing for growth and integrating their recent acquisition of investment technology group. However, the stock market didn't give them any credit for these long-term investments and punished the company with a 40 decline in the share price. Their stock is very volatile.

The relatively low market volatility of 2021 will likely cause their earnings to show sharp year-over-year declines because 2020 was so strong. This may cause short-term focused investors to sell their shares, pushing the price down, but i would view any dips as a buying opportunity. Alright guys that wraps it up for this video, what do you think about vertu? Are there any other fintech stocks that you like better? Let us know, in the comments section below also don't forget, to check out our second channel the economic outlook, where we discuss interesting topics related to economics. If you enjoyed this content, don't forget to like subscribe and share as always.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.