Cloud Migration And Robinhood's 24 Million Users Will Improve Future Efficiency

Key Takeaways

• CME Group's strategic customer savings and fee adjustments are expected to boost trading volume, revenue, and net margins.
  
• Expansion into commodities and new client strategies, including retail markets, should enhance growth and operating efficiencies.
  
• CME Group faces revenue and earnings risks from regulatory challenges, tech investment costs, and reliance on commodities and retail trading growth amid market uncertainties.

Catalysts

Operates contract markets for the trading of futures and options on futures contracts worldwide.

• CME Group's significant customer margin savings of approximately $60 billion per day across all asset classes is likely to attract more trading volume, enhancing revenue growth.
  
• Expansion in commodities, especially with metals, energy, and agriculture volumes rising by 23%, 17%, and 13% respectively, should boost revenue, driven by increased activity from global hedge funds and geographical growth, especially in EMEA.
  
• New client acquisition strategies, including rolling out futures to Robinhood's 24 million customers, should drive volumes and thereby revenue growth, with retail customers contributing greatly to transaction and clearing revenue.
  
• CME Group's strategic fee adjustments, including futures and options transaction fee increases, and a non-cash collateral surcharge expected to add 2% to 2.5% to pretax income, will enhance net margins.
  
• The cloud migration strategy, including approximately $115 million in related expenses for 2025, will eventually lead to efficiencies and cost savings, positively impacting operating margins.

CME Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CME Group's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 56.9% today to 57.7% in 3 years time.
• Analysts expect earnings to reach $4.1 billion (and earnings per share of $11.55) by about March 2028, up from $3.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.1x on those 2028 earnings, up from 27.6x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

CME Group Future Earnings Per Share Growth

Risks

• The extent of CME Group's future performance is subject to uncertainties and assumptions that could lead to actual outcomes differing materially, posing a risk to future revenue growth and earnings.
  
• Regulatory challenges, particularly concerning CME Group's clearing services and the competitive environment for U.S. Treasury and interest rate contracts, may impact revenue streams and market share.
  
• Changes in pricing, such as the 1% to 1.5% increase in futures and options transaction revenue, might not sufficiently offset shifts in trading volumes and tiering, potentially affecting net margins.
  
• The cost associated with migrating to the cloud and the investment in technology might exceed projected benefits, potentially constraining future net income and capital expenditure flexibility.
  
• CME Group's reliance on continued growth in commodities and the retail trading segment could face pressures from geopolitical tensions, economic conditions, or market volatility, impacting both revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $257.647 for CME Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $290.0, and the most bearish reporting a price target of just $200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.0 billion, earnings will come to $4.1 billion, and it would be trading on a PE ratio of 28.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of $266.49, the analyst price target of $257.65 is 3.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.