Investments In Technology And Mortgage Platforms Will Energize Energy Markets

Key Takeaways

• Investment in technology and data services enhances efficiencies and supports growth in recurring revenues, potentially improving margins.
  
• Expanding energy markets and trading volumes, alongside mortgage technology investments, position ICE for significant revenue growth.
  
• Macroeconomic uncertainties and geopolitical tensions could affect energy and mortgage markets, impacting transaction volumes, recurring revenues, and overall net margins.

Catalysts

Provides technology and data to financial institutions, corporations, and government entities in the United States, the United Kingdom, the European Union, India, Israel, Canada, and Singapore.

• ICE's investment in technology and data services is contributing to improved operating efficiencies and growth in recurring revenues, which could positively impact margins going forward.
  
• The expansion of their energy markets and the increase in energy derivatives trading volume and open interest position ICE to benefit from continued volatility and demand in global energy markets, likely driving revenue growth.
  
• The growth in ICE's fixed income and data services segment, including the adoption of new fixed income indices and increasing assets under management benchmarked to ICE indices, suggests sustained demand for these services that could boost recurring revenue.
  
• Significant investment in ICE's mortgage technology platform and successful client acquisitions, such as new contracts with United Wholesale Mortgage and other large lenders, could enhance future revenue streams by solidifying ICE's position in the mortgage market.
  
• ICE's focus on returning capital through share buybacks, concurrent with continued deleveraging, is expected to improve earnings per share by reducing the share count, benefiting overall shareholder returns.

Intercontinental Exchange Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Intercontinental Exchange's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.4% today to 33.7% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $6.94) by about May 2028, up from $2.8 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 36.5x on those 2028 earnings, up from 36.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Intercontinental Exchange Future Earnings Per Share Growth

Risks

• Macroeconomic uncertainties and exchange rate fluctuations, such as a weaker dollar relative to the pound and euro, could lead to increased expenses, potentially impacting net margins.
  
• Rising geopolitical tensions and potential changes in energy trade dynamics might impact transaction volumes and revenues in energy markets negatively if the situation stabilizes, as historically lower volatility can reduce the need for hedging.
  
• Increased competition or merger activities within the mortgage technology segment could pose risks to sustaining recurring revenues, especially if significant clients like Flagstar or Rocket/Cooper transition services, affecting overall earnings.
  
• Lengthening sales cycles in the fixed income and data services business may slow down new customer acquisition and ASV growth, impacting future revenue growth in this segment.
  
• The anticipated changes in geopolitical situations, such as a potential Russia-Ukraine resolution, might reduce volatility and trading volumes, impacting energy markets and consequently ICE's transaction-based revenues.

Valuation

• The analysts have a consensus price target of $192.438 for Intercontinental Exchange 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 $239.0, and the most bearish reporting a price target of just $158.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.2 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 36.5x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $175.19, the analyst price target of $192.44 is 9.0% higher. 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.