VALUATION HIGHLIGHTS

1. Data Services & Others constitute 69% of the Trefis price estimate for IntercontinentalExchange's stock.
2. Derivatives Trading constitutes 26% of the Trefis price estimate for IntercontinentalExchange's stock.

WHAT HAS CHANGED?

Latest Earnings

In Q3 2022, ICE reported Total Net Revenues (revenue minus transaction-based expenses) of $2 billion, which was 11% more than the year ago period. It was mainly because of growth in mortgage technology revenues.

Intercontinental Exchange (ICE) owns exchanges for financial and commodity markets. It drives more than 62% of its revenues from transaction and clearing services which include from our derivatives, fixed income, cash equities and equity options trading and derivatives clearing. The exchange is witnessing high trading activity since the pandemic. This, in turn, means that the exchange would generate more revenue in terms of transaction and clearing fees. Further, the company is focused on growing its mortgage technology offerings, which has shown strong growth over the recent quarters. The company posted $7.3 billion in net revenues for FY2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are some key drivers of ICE's value that present opportunities for upside or downside to the current Trefis price estimate:

• ICE's Data Services Expanding Phenomenally: The demand for data-driven insights and analytics-driven recommendations has increased substantially in the last couple of years. The company's acquisitions in this regard have been able to expand the markets served by the company, add technology platforms, and increase risk management, new data, and valuation services. In 2021, the segment generated $2.5 billion in revenues, which increased to $2.6 billion in 2022. We expect them to continue increasing over the next few years to nearly $4.7 billion by the end of our forecast period. However, if the increased growth rate due to increasing demand and adoptions leads to revenues of around $5 billion, we could see an 2% upside to our price estimate.

• ICE's Derivatives Contracts Traded: ICE has a large derivatives portfolio of its own. It is one of the largest energy futures exchanges in the world, and also offers derivatives on agricultural commodities, metals, and credit default swaps, among others. The total volume of these derivatives has grown rapidly in the last few years. The volumes increased marginally in the last three years due to increased volatility from a continuous shift in oil prices. Moreover, interest rate derivative volumes jumped due to the rate hikes in 2015-2018. In 2022, the total volumes came in at 1,014 million. We expect them to continue growing over the next few years.

BUSINESS SUMMARY

Established in May 2000, IntercontinentalExchange is one of the largest exchange operators and clearing houses in the world. Focused on growth, it has followed an aggressive acquisition strategy throughout its short history and recently purchased NYSE Euronext, its largest acquisition ever.

ICE acquired Interactive Data and Trayport in December 2015. Interactive Data is a provider of financial market data, analytics, and related trading solutions, serving the mutual fund, bank, asset management, hedge fund, securities, and financial instrument processing and administration sectors. Trayport is a software company that licenses its technology to serve exchanges, OTC brokers and traders to facilitate electronic and hybrid trade execution primary in the energy markets. These acquisitions are aimed at boosting ICE's data service revenues.

After buying NYSE, ICE had a business portfolio that includes cash trading, listings, derivatives, and data services businesses in the U.S. as well as Europe. However, the company exited its European cash and listings businesses in June 2014 through an IPO.

Acquisitions of TMX Atrium and BofAML's Global Research Index Platform in late 2017 and BondPoint, Chicago Stock Exchange, and TMC in 2018 should not only expand its geographic and product presence but also, offer advanced and diverse fixed income solutions, improve its technology platforms, and provide new data and valuation services.

SOURCES OF VALUE

Data Services

Over half of the value in ICE's stock currently comes from its market data and technology business. This division sells market data to market participants, along with other services such as terminal access, direct access services, daily indexes, and end of day reports. Revenue from this division has grown recently due to an increase in the number of users and an increase in pricing, along with acquisitions undertaken (Interactive Data & Trayport).

Derivatives

The derivatives business is the largest and fastest-growing division within the firm. It is also one of the most profitable segments, having EBITDA margins of around 73% according to our estimates. The division is likely to continue growing over the next few years as regulations around the world force over-the-counter (OTC) derivatives onto centralized clearing platforms similar to those operated by ICE.

Equity Trading and Listings

The acquisition of NYSE also provided ICE the ownership of cash equities, equity options, and listings franchises in the U.S. Collectively, these businesses account for just under 6% of the value in the company.

KEY TRENDS

Increasing demand for data services and products

Amid geopolitical turmoil and distressed market conditions, investors continue to seek data-driven advice and advanced technological products for improved earning opportunities. With an increased demand for data services and competitors like NASDAQ also cashing in on this demand, ICE's services catering to both equities and derivative will put it in a leading position in the future.

Intense competition among exchanges

Given the huge opportunity in Europe, almost all the major U.S. exchanges are trying to boost their presence across the Atlantic. NASDAQ has already launched a futures exchange in London, while CME is in the process of doing so. Both the exchanges are likely to compete aggressively with ICE in the future to gain market share. The intense competition could also lead to price wars among these players and negatively impact profit margins.