Key Takeaways From CME’s Q1

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After a decent performance through 2017, CME Group (NASDAQ:CME) announced impressive Q1 results on April 26.  The exchange’s trading volumes saw phenomenal growth in the quarter, with daily volumes coming in 29% above the year ago levels. Since transaction fees account for over 85% of CME’s revenue, growth in quarterly volumes drove the company’s top line by nearly 20% y-o-y.

We have a $146 price estimate for CME’s stock, which is below the current market price. We have created an interactive dashboard where you can change the company’s forecast revenue, margins, and other key drivers to gauge how they would impact its expected results and valuation.

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Despite the recent declines, the company remains bullish on its Market Data and Information Services segment, with new products in the pipeline with enhanced business intelligence and machine learning capabilities. The company has managed to gain traction by offering data services to its customers largely free of charge until recently, and we expect that many of its existing customers will be willing to pay for more advanced products.

Recent rate hikes and the Fed’s indications of a series of hikes in the year ahead has boosted investor interest in interest rate derivatives, with trading volumes 29% ahead of the levels seen in Q1 2017. Energy derivatives maintained solid volumes with the recent surge in oil prices and OPEC’s recent stance on capping production. Meanwhile, metal derivatives saw a 39% growth in trading volumes as they are considered a safe investment asset. Moreover, the continuous movements in gold and silver prices have continued to boost metals derivative volumes. We expect further volume growth with further improvement in the U.S. economy.

CME also recently launched bitcoin futures trading on its platform. With this initiative, the company is looking to get an early mover’s advantage in the volatile but fast-growing space. Out of a total limit of 21 million bitcoins which can be mined, based on the existing protocol, the current bitcoins in circulation stands around 17 million. With the growth in supply slowing down, bitcoin trading provides a solid opportunity for exchanges. Over the long run, this could provide a healthy boost to CME’s trading volumes.

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