Are Intercontinental Exchange shares undervalued?


Intercontinental Stock Exchange (NYSE: ICE), one of the world’s largest exchange operators and clearinghouses, gained a meager 3% – from around $ 115 at the start of 2021 to around $ 119 currently, underperforming the S & P500, which rose by 14% over the same period. While the stock benefited from an increase in both stock and stock options trading volumes in 2021, the positive impact was offset by lower contract volume in other categories. Overall, the stock has experienced high volatility this year.

There were two main reasons behind the surge in stock trading volumes: First, the approval of the $ 1.9 trillion stimulus package. Second, the higher level of retail investor engagement.

But is that all there is in the story?

Not quite, despite recent gains, Trefis estimates Valuation of Intercontinental Exchange at around $ 132 per share – 11% above the current market price – based on a key opportunity and risk factor.

The opportunity we see is an improved trajectory for Intercontinental Exchange revenues during the following quarters. ICE’s total revenue of $ 8.2 billion for full year 2020 was 26% higher than in 2019. This translated into net revenue (revenue minus expenses related to transactions) of $ 6 billion, up 16% year-on-year. It was driven by growth in clearing and transaction fees due to higher transaction volumes in the United States, coupled with a 2.28-fold increase in mortgage technology revenue due to the acquisition of the company. technology mortgage “Ellie Mae” last year.

The company posted better-than-expected results in the first quarter of fiscal 2021. It reported total revenue of $ 2.4 billion, up 15% year-on-year, which translated into revenue net of $ 1.8 billion. While clearing and transaction revenues were down slightly from the period last year, the growth was solely due to a 6.72-fold increase in mortgage technology revenues. That said, clearing and transaction revenues contributed almost 65% of net revenues in 2019, which increased to 76% in 2020 due to higher transaction volumes. We expect higher transaction volumes to continue to dominate quarterly results in the coming months as well, before normalizing as the economy recovers. In addition, its non-commercial revenues are expected to continue their positive growth path in fiscal 2021. Overall, we expect ICE’s revenues to reach $ 9.2 billion in the current year. .

Operating expenses are expected to increase slightly in fiscal 2021, which should partially offset the benefit of higher revenues. The company is expected to report net income of $ 1.7 billion, about 18% lower than the previous year. This will result in EPS of $ 3.15, which, coupled with the P / E multiple of 42x, will lead to a valuation of around $ 132.

Finally, how much should the market pay per dollar of Intercontinental Exchange earnings? Well, to make almost $ 3.15 a year from a bank today, you would have to deposit around $ 315 into a savings account, which is around 100 times the desired earnings. At the current Intercontinental Exchange share price of around $ 119, we’re talking about a P / E multiple just below 38x. And we think a number around 42x will be appropriate.

That said, despite some growth recorded over the past year, a financial swap is still a risky proposition. While growth is likely, a change in current market sentiment can hurt the near-term outlook. What is behind this?

Intercontinental Exchange derives the majority of its income from clearing and transaction fees. This, in turn, means that it is highly dependent on transaction volumes. The recent surge in transaction volumes is due to the greater engagement of retail investors. While retail investor participation has grown significantly over the past year, it should be noted that they do not have much loss capacity. Any sudden correction in the market price can result in considerable losses for them, push them into bankruptcy and adversely affect trading volumes. To sum up, we believe that the Intercontinental Exchange stock is undervalued and offers advantages.

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