Is Intercontinental Exchange Stock Undervalued?

BRAZIL, MAY 25, 2020: An Intercontinental Exchange, ICE logo is shown… [+] displayed on a smartphone in this photo illustration. (Image courtesy of Rafael Henrique/SOPA Images/LightRocket/Getty Images)
Getty Images/SOPA Images/LightRocket
Intercontinental Exchange (NYSE: ICE), one of the world’s leading exchange operators and clearing houses, gained only 3%, rising from approximately $115 at the start of 2021 to roughly $119 today, trailing the S&P500, which increased by 14% during the same period. Higher cash equities and equity options trading volumes helped the stock in 2021, but the positive impact was offset by reduced contract volume in other categories. This year has seen a lot of volatility in the stock. The increase in equity trading volumes was due to two key factors: First, the $1.9 trillion stimulus package was approved. Second, there is a larger level of participation among retail investors.
Is this, however, the end of the story?
Despite recent increases, Trefis forecasts that Intercontinental Exchange is worth $132 per share, or 11% more than the current market price, based on a key opportunity and one risk issue.
The opportunity we see is for Intercontinental Exchange’s revenues to improve over the next few quarters. ICE’s overall revenues for the whole year 2020 were $8.2 billion, up 26% from the previous year. This resulted in $6 billion in net revenues (revenue minus transaction-based expenses), increasing 16 percent year over year. It was fueled by an increase in clearing and transaction fees as a result of increasing trading volumes in the United States, as well as a 2.28x increase in mortgage technology income following the acquisition of mortgage tech business ‘Ellie Mae’ last year.
In the first quarter of FY2021, the corporation delivered better-than-expected results. It recorded total revenues of $2.4 billion, up 15% year over year, translating to $1.8 billion in net revenue. While clearing and transaction revenues were somewhat lower than a year ago, the boost was driven entirely by a 6.72x increase in mortgage technology revenues. However, clearing and transaction revenues accounted for about 65 percent of net revenues in 2019, rising to 76 percent in 2020 as trading volumes climbed. Higher trade volumes are expected to continue to dominate quarterly results in the following months, before normalizing with the economy’s recovery. Furthermore, non-trading income are expected to maintain their upward trend in FY2021. Overall, we predict ICE to generate $9.2 billion in revenue this year.
ADDITIONAL INFORMATION FOR YOU
In FY2021, operating expenses are expected to grow somewhat, partially offsetting the advantage of rising revenues. The corporation is expected to make a net profit of $1.7 billion, down 18% from the prior year. This will produce an EPS of $3.15, which, when combined with the 42x P/E multiple, will result in a price of roughly $132.
Finally, how much should the market pay for each dollar earned by the Intercontinental Exchange? To earn close to $3.15 a year from a bank, you’d need to put about $315 in a savings account today, which is about 100 times the needed returns. We’re talking about a P/E multiple of just under 38x at Intercontinental Exchange’s current share price of around $119. And we believe that a figure of 42x is appropriate.

Trefis EPS
Despite the fact that it has grown in the previous year, a financial exchange is still a dangerous proposition. While growth is expected, a shift in market attitude could jeopardize the near-term prospects. What’s going on here?
The majority of Intercontinental Exchange’s revenue comes from clearing and transaction fees. As a result, it is highly reliant on trading volumes. The increased participation of retail investors was responsible for the recent increase in trading volumes. While retail investor engagement has expanded dramatically over the last year, it should be remembered that they do not have considerable risk-taking potential. Any abrupt market course correction might result in significant losses for them, potentially forcing them out of business and reducing trading volumes. To summarize, we feel the stock of Intercontinental Exchange is cheap and has room for growth.
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