The New York Stock Exchange is part of the Intercontinental Exchange (Photo: Freepik, alex9500)
In the spring we already presented Deutsche Börse as an interesting stock from the financial sector. In this article we want to look at it Intercontinental Exchange (ICE). Today, ICE is a leading provider of technology and data solutions for the financial industry. But their origin is different.
The path to becoming a global financial giant
Jeffrey Sprecher founded ICE in 2000. Spokesman saw the opportunities of digitalizing energy trading early on. The pioneer recognized its inefficiency, as prices were usually negotiated over the phone. In 1997, Sprecher took over the Continental Power Exchange, a platform for trading surplus electricity, and developed it into one of the first electronic trading exchanges for energy products.
With the decline of the energy company Enron, ICE became more important. Goldman Sachs and Morgan Stanley supported Speaker’s platform. The Continental Power Exchange soon expanded its offerings to include other commodities, currencies and stock indices and became the Intercontinental Exchange. A significant milestone was the takeover of the New York Stock Exchange for around $8 billion and the spin-off of Euronext, a key competitor to ICE.
Today there is an extensive range of services
ICE is now the operator of 13 regulated exchanges. This includes the New York Stock Exchange, on which around 70 percent of the S&P 500 companies are listed. The main revenue drivers are transaction, listing and clearing fees with 56 percent of total revenue.
However, stock exchange trading itself accounts for 50 percent of sales. Further revenue is generated through trading and data fees for fixed income securities (28 percent of sales with growth of around 9 percent per year).
However, the fastest growing segment is mortgage technology. Growth is 20 percent annually and the share of sales in the past financial year was 16 percent.
Growth is generated organically and through acquisitions
Since its founding, ICE has relied heavily on strategic acquisitions to penetrate new markets. On the one hand, the aforementioned acquisition of the New York Stock Exchange, but also the acquisition of Ellie Mae in 2020 and Black Knight in 2023, which served the expansion strategy in the mortgage technology sector.
The average 12 percent sales growth over the last 10 years also resulted from takeovers. The high-margin stock market trading business compensates for the other segments that are still making losses, so that ICE can report an operating margin of 47 percent. The return on capital (8.3 percent) and the debt level (3.9 EBITDA) suffer due to takeovers.
ICE has a significant competitive advantage
A significant moat was created with the takeover of the New York Stock Exchange. The NYSE brand and ICE’s extensive data services generate regular revenue and are indispensable to customers.
There is also the advantage of network effects and the fact that futures can only be traded on ICE. As the number of traders increases, the platform becomes more attractive and liquidity increases. Ultimately, the economies of scale can be used. They significantly accelerate cost reduction and lead to higher margins.
ICE also benefits from the invisible switching costs. Other trading platforms offer worse trading conditions and have less liquidity. Futures cannot be transferred to other platforms anyway, and many customers have integrated ICE’s data into their own system. A change would be neither beneficial nor desirable.
What’s the catch?
The risks of investing in ICE are primarily based on a current valuation that is too high. The price-earnings ratio (P/E) is at the upper end of the 10-year average (P/E 26) and therefore does not provide a safety margin. Entry at the current level could only lead to a significant return with a time lag. Of course, there are also risks such as stricter regulations or technological changes that endanger the business model.
Since ICE also relies on acquisitions, errors in the acquisition strategy such as poor integration can jeopardize synergy effects. A price premium that is too high poses a threat to profitability. However, the risks are manageable because there is a corresponding market position and expertise within the company. The company has a decades-long track record of acquiring and integrating companies.
ICE is a quality stock for long-term investors.
Disclaimer:
Not investment advice. No call to buy or sell securities.
Michael Somers