MOON ATS And EDGAR Online Expansion Will Open New Market Opportunities

Key Takeaways

• New product launches and strategic expansions are aimed at boosting trading volumes and Corporate Services and market data revenues.
  
• Focus on regulatory dialogue and IT investments aims to increase listings and enhance operational efficiency, supporting stable or improved margins.
  
• Increased operating expenses, coupled with declines in revenue streams and market competition, risk compressing margins and challenging OTC Markets Group's growth and financial stability.

Catalysts

Operates regulated markets for trading 12,000 U.S.

• The launch of OTC Overnight and MOON ATS aims to capitalize on the growing interest in overnight trading, potentially increasing trading volumes and subsequently boosting OTC Link revenues.
  
• The introduction of the OTCID Basic Reporting Market, set to launch in July 2025, aims to enhance market structure by offering more value and attracting more subscribers, which could improve Corporate Services revenue.
  
• Strategic focus on expanding the EDGAR Online data use and developing new market data solutions is likely to support growth in market data licensing revenue.
  
• Increased industry dialogue and a supportive regulatory environment could lead to policy changes facilitating capital formation for small companies, potentially increasing the number of listed companies and Corporate Services revenue.
  
• The continuous improvement approach and strategic initiatives in IT and human capital investment aim to enhance operational efficiency, likely supporting stable or improved net margins over time.

OTC Markets Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OTC Markets Group's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.5% today to 27.4% in 3 years time.
• Analysts expect earnings to reach $34.0 million (and earnings per share of $2.85) by about April 2028, up from $26.8 million 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 25.1x on those 2028 earnings, up from 20.2x today. This future PE is greater than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

OTC Markets Group Future Earnings Per Share Growth

Risks

• The decrease in corporate services revenue and a reduced number of subscribers in 2024, particularly impacting OTCQX and OTCQB, indicates potential challenges in maintaining and growing their client base, which could stress future revenue streams.
  
• The increase in operating expenses, particularly in compensation, benefits, IT, and infrastructure costs, if not matched with similar revenue growth, could compress net margins and reduce overall earnings.
  
• Fluctuations in trading volumes and market data licensing revenues, including the unpredictable nature and potential declines thereof, could negatively impact revenue growth and financial stability.
  
• The competitive landscape for overnight trading, where exchanges and new entrants are planning similar services, presents a risk to gaining market share and growing this new revenue stream in the future.
  
• Uncertain regulatory changes and the reliance on regulatory approvals for new initiatives like OTCID and overnight trading might introduce risks to the timely execution of strategic projects, potentially impacting revenue and market penetration.

Valuation

• The analysts have a consensus price target of $63.0 for OTC Markets Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $124.1 million, earnings will come to $34.0 million, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $45.99, the analyst price target of $63.0 is 27.0% higher.
• 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.