IntercontinentalExchange’s 2017 In Review

IntercontinentalExchange (NYSE:ICE) has had a fairly strong 2017, as the exchange managed to grow its revenue by 4% in the first 9 months of the year, and its stock price has gained nearly 23% since the beginning of the year. This performance is primarily attributable to the growth in the company’s Data Services segment. Additionally, the growth in revenue from derivative trading has been able to offset the losses from equity trading.

Data Services Growth Due To Global Demand, Acquisitions

ICE’s Data Services business generates around 45% of the company’s overall revenues. This business grew by around 7% through the third quarter. With increasing demand for data-driven insights and analytics-driven recommendations, the company’s acquisitions such as YellowJacket, NYSE, Interactive Data and TMX Atrium have helped it expand its market reach and add technological capabilities as well as new data and valuation services. With increased demand for data services and competitors like NASDAQ also cashing in on this demand, the company’s acquisitions seem to be a good strategic fit. ICE has witnessed increased revenue contribution from data services in the last few years. As industry competition has intensified, the exchange’s focus on strengthening its Data Services segment makes sense as a way to cover up for the muted performance by the trading segment.

We expect ICE to broaden its offerings to cater to additional markets going forward, and add technology platforms and increase risk management, new data and valuation services. This is likely to propel further growth in this segment in the future.

Derivative Trading Volumes Saw Growth; Equities Remained Under Pressure

ICE’s clearing and transaction fees, which contributed around 41% of its overall revenues, remained flat in comparison to the prior year quarter. Among asset classes, the growth in financial derivatives was largely driven by the phenomenal growth (+37% y-o-y) in interest rate derivative volumes. With the expectations of another rate hike, we expect the growth momentum to sustain in the near term. Among commodities, energy derivatives saw a significant surge (+12% y-o-y). The demand-supply gap led to increased volatility in the oil market throughout the last couple of years. Oil prices have continued to fluctuate due to OPEC’s stance on capping production. Since the outlook for the restricted production of oil remains uncertain, we expect the market volatility to sustain in the near term, leading to continued growth in trading volumes.

Equity options and cash equities suffered the most, with more than a 16% and 18% drop in trading volumes, respectively. As industry-wide volumes remained largely unchanged, the company’s market share losses are a concern. The exchange generates around 30% of its revenues from these asset classes. With a timid performance across both in the current quarter, we expect ICE’s top line to remain under pressure.

We have a $70 price estimate for Intercontinental Exchange’s stock, which is about in line with the current market price.

Please refer to the full Trefis analysis for Intercontinental Exchange.