Intercontinental Exchange Stock Has Limited Strength

[Updated 12/8/2020] Intercontinental Exchange Update

After a 65% rally since the March bottom, at the current price near $110 per share, we believe  Intercontinental Exchange’s stock (NYSE: ICE) has reached its near term potential. ICE stock has increased from $67 to $110 off the recent bottom compared to the S&P 500 which increased almost 65%. The stock is currently 10% higher than its pre-Covid peak and is trading in sync with the broader market. This is because investors are positive about the growth in its revenues driven by higher trading volumes – its top-line has grown 17% to a consolidated figure of $7.7 billion for the last 4 quarters from the consolidated figure of $6.6 billion for the 4 quarters before that. 

Intercontinental Exchange (ICE) generates more than 62% of its revenues from Transaction and Clearing Fees, charged on a per-transaction basis for trading in derivatives, cash equities, fixed income, equity options, etc. Due to the Covid-19 crisis, the securities market has witnessed significant volatility and higher trading volumes. This, in turn, benefited the exchange, which outperformed the consensus estimates in its recently released Q3 results. It reported net revenues (revenue minus transaction-based expenses) of $1.4 billion – 6% more than the year-ago period, mainly driven by a 38% growth in total transaction and clearing revenues. However, as the economy inches toward normalcy, the higher trading volumes are likely to normalize, negatively impacting ICE’s revenues. Besides, ICE’s P/E multiple changed from just above 16x in 2017 to around 27x in 2019. While the company’s current P/E is close to 32x, there is a downside risk when the current P/E is compared to the previous years – P/E of around 27x at the end of 2019 and 22x in 2018. Our dashboard Buy Or Sell Intercontinental Exchange Stock? provides the key numbers behind our thinking.

[Updated 9/18/2020] Intercontinental Exchange Stock Is Quite Expensive

After a 50% rise since the March 23 lows of this year, at the current price of around $100 per share we believe Intercontinental Exchange’s stock (NYSE: ICE) looks fully valued based on its historic P/E multiples. Intercontinental Exchange, one of the largest exchange operators and clearing houses in the world, has seen its stock rally from $67 to $101 off the recent bottom compared to the S&P which also moved around 50%. Its stock is in sync with the S&P 500 index, as the company has profited from higher trading volumes in the securities market due to the Covid-19 crisis. Notably, its revenues grew by 7% y-o-y in the second quarter, mainly driven by 33% growth in total transaction and clearing revenues. Further, its stock is still 10% above the levels seen in late 2019. 

Intercontinental Exchange’s stock has bested the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, trading volumes in the securities market are likely to normalize over the next few months. 

Some of the rise of the last 3 years is justified by the roughly 15% growth seen in Intercontinental Exchange’s revenues (revenue minus transaction-based expenses) from 2016 to 2019, which translated into a 35% growth in Net Income. The Net income figure was higher in 2017 due to the one-time effect of the U.S Tax Act.

While the company has had stable revenue and earnings growth over recent years, its P/E multiple has seen some increase. We believe the stock is unlikely to see an upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Why Intercontinental Exchange Stock moved 88% between 2016 and now has the underlying numbers.

Intercontinental Exchange’s P/E multiple has changed from just above 22x in 2016 to about 27x in 2019. While the company’s P/E is around 29x now, there is a downside risk when the current P/E is compared to levels seen in the past years – P/E of close to 27x at the end of 2019 and around 22x as recently as late 2016.

So what’s the likely trigger and timing for the downside?

Intercontinental Exchange (ICE) owns exchanges for financial and commodity markets. It generates more than 62% of its revenues from Transaction and Clearing Fees which are charged on a per-transaction basis for trading in derivatives, cash equities, fixed income, equity options, etc. The Covid-19 crisis and economic uncertainty have resulted in high market volatility, leading to a significant jump in trading volumes. This, in turn, means that the exchange would generate more revenue in terms of transaction and clearing fees. However, as the economic condition improves in the coming months, market volatility is likely to decline, normalizing the trading volumes. This implies that the Intercontinental Exchange’s revenue growth rate is likely to decrease in Q3 on a sequential basis.

Additionally, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.  

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