Intercontinental Exchange’s stock (NYSE: ICE) has gained roughly 11% YTD, as compared to the 18% rise in the S&P500 over the same period. Further, at the current price of $114 per share, ICE stock is trading 11% below its fair value of $129 – Trefis’ estimate for Intercontinental Exchange’s valuation.
Amid the current financial backdrop, ICE stock has seen little change, moving slightly from levels of $115 in early January 2021 to around $115 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, ICE stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 19% in 2021, -25% in 2022, and 11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 – indicating that ICE underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ICE face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
The company posted mixed results in the third quarter of 2023, with earnings beating the estimates but revenues missing expectations. It reported net revenues (revenue minus transaction-based expenses) of $2 billion – up 11% y-o-y. The growth was mainly because of a 26% drop in the transaction-based expenses, followed by a 5% rise in the fixed income & data services and a 20% increase in the mortgage technology revenues. On the expense front, the operating expenses increased 29% y-o-y in the quarter. However, the negative impact was more than offset by an improvement in other income from -$1.24 billion to -$163 million. Overall, the adjusted net income was $541 million, as compared to a net loss of $191 million in the year-ago period.
The net revenues grew 5% y-o-y to $5.79 billion in the first three-quarters of FY2023. It was mainly because of lower transaction-based expenses and a 7% rise in the fixed income & data services revenues. Further, the operating expenses as a % of revenues witnessed an unfavorable increase over the same period, but the impact was more than offset by higher other income. Altogether, the adjusted net income rose by 95% y-o-y to $1.99 billion.
Moving forward, we expect the Q4 results to be on similar lines. Overall, Intercontinental Exchange revenues (total revenues) are estimated to touch $9.72 billion in FY2023, translating into net revenues of around $8.02 billion. Additionally, ICE’s adjusted net income margin is likely to improve in the year, leading to an annual GAAP EPS of $5.62. This coupled with a P/E multiple of 23x will lead to a valuation of $129.
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