CME Group ( CME ) has done reasonably well so far this year, with revenues growing nearly 3% in the first three quarters of 2017 while the stock price has increased by over 30% since the beginning of the year. This can be attributed to the company’s continued efforts in expanding its global footprint and its diverse product line to suit investor demand. The company has managed to grow its trading volumes by 5% year to date through November, driven by its diversified offerings. The decline in trading volumes across equities was more than offset by a surge in trading activity across interest rate, energy and metal derivatives. Consequently, the exchange saw an increase in clearing and transaction fees, which generates 85% of the company’s revenue.
We have a $120 price estimate for CME’s stock , which is below the current market price.
Interest Rate Derivatives Continued To Grow Under Fed Guidance
Interest rate derivatives have been the highest in terms of trading volumes, with around 10% year-to-date growth. The Fed’s interest rate hikes led to a significant increase in derivative volumes throughout the year. However, a tough year-on-year comp – due to significant growth in November 2016 – led to a 21% decline in November 2017.
Oil Prices Have Led To Improved Volumes
The demand-supply gap led to increased volatility in the oil market throughout the last couple of years. Oil prices have continued to fluctuate due to OPEC’s stance on capping production. This propelled 6% year-to-date growth in energy derivative volumes. Since the outlook for the restricted production of oil remains uncertain, we expect the market volatility to sustain in the near term, thus leading to continued growth in trading volumes.
Bitcoin Demand, Market Data Business Suggest Positive Growth Outlook
CME has recently launched bitcoin futures trading on its platform. With this initiative, the company is looking to get an early movers’ advantage in the volatile but fast-growing asset class. With strong global demand, bitcoin prices have risen more 15x since the beginning of 2017. Out of a total limit of 21 million bitcoins which can be mined, based on the existing protocol, the current bitcoins in circulation stands around 16.7 million. With the growth in supply slowing down, bitcoin trading provides a solid opportunity for exchanges. Over the long run, this could provide a healthy boost to CME’s trading volumes.
Despite recent mixed results, the company remains bullish on its Market Data and Information Services segment, with new products in the pipeline with enhanced business intelligence and machine learning capabilities. The company has gained traction by offering many data services to its customers free of charge until recently, and we expect that many of its existing customers will be willing to pay for more advanced products.
Please refer to the full Trefis analysis for CME Group.
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