Regulatory Hurdles And Decentralized Finance Will Undermine Trading Income

Key Takeaways

• Rising global competition, decentralized finance, and regulatory complexity are worsening revenue pressures and threatening Euronext's traditional business model.
  
• Difficulty integrating acquisitions and increased operational costs may compress margins and undermine recent earnings improvements.
  
• Euronext's diverse, resilient revenue streams and successful acquisitions drive margin expansion, stability, and growth, while increasing its strategic importance amid evolving European capital markets.

Catalysts

Operates securities and derivatives exchanges in the Netherlands, France, Italy, Belgium, Portugal, Ireland, the United States, Norway, Denmark, and internationally.

• The ongoing shift of global capital flows towards the US and Asia threatens to erode Euronext's trading volumes and listing revenues over time, undermining the company's revenue growth prospects as it becomes less relevant in the global exchange landscape.
  
• Growing adoption of decentralized finance and blockchain-based trading platforms poses a direct threat to Euronext's core trading income, as disintermediation may result in clients bypassing traditional exchanges entirely, putting significant pressure on long-term transaction fee revenue.
  
• Increasing regulatory fragmentation and protectionism across European markets is likely to complicate pan-European integration, drive up compliance and operational costs, and deter international listings, which could compress net margins and stifle top-line growth.
  
• Failure to fully integrate and realize cost synergies from acquisitions such as ATHEX, especially if new markets like Greece do not achieve the expected growth, may result in elevated ongoing costs and a weaker earnings profile, reversing prior margin expansion trends.
  
• Intensifying competition from both established global exchanges and emerging alternative trading venues is expected to force downward pressure on trading and data fees, further reducing Euronext's realized revenues and threatening the sustainability of high EBITDA margins.

Euronext Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Euronext compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Euronext's revenue will grow by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 37.6% today to 35.9% in 3 years time.
• The bearish analysts expect earnings to reach €706.2 million (and earnings per share of €6.94) by about August 2028, up from €652.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, down from 21.6x today. This future PE is lower than the current PE for the GB Capital Markets industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 2.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

Euronext Future Earnings Per Share Growth

Risks

• Euronext's diversified business model is generating significant and growing levels of non-volume-related revenue, with 58% of total revenue now coming from sources such as data, securities services, and technology, reducing vulnerability to trading volume fluctuations and supporting resilient top-line and earnings growth.
  
• The company is demonstrating successful execution in integrating acquisitions (such as Borsa Italiana, Admincontrol, and the planned ATHEX deal), consistently achieving or exceeding announced synergy targets, which supports ongoing margin expansion and enhances long-term profitability.
  
• Structural expansion into post-trade and clearing activities, such as the roll-out of repo clearing and services like tri-party collateral management, is driving recurring, less cyclical, and higher-margin revenue streams, strengthening earnings stability and visibility.
  
• Brisk growth in advanced data solutions, corporate investor solutions, and technology services-fueled by digitalization, increasing retail investor demand, and cross-selling with recent acquisitions-provides opportunities for premium pricing and further revenue diversification, likely boosting overall revenue and net margins.
  
• The European Union's ongoing integration of capital markets, increased cross-border capital flows, and Euronext's role as a consolidator position the company to benefit from secular industry tailwinds, potentially raising its listing revenues and international relevance, resulting in sustained revenue and earnings growth.

Valuation

• The assumed bearish price target for Euronext is €114.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Euronext's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €174.0, and the most bearish reporting a price target of just €114.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €706.2 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of €141.0, the bearish analyst price target of €114.0 is 23.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.