NYSE Euronext (NYX) will announce its earnings for the second quarter of 2012 on Friday, Aug. 3. The three months ending June were quite eventful for the exchange as it expanded its diverse global operations, while the Facebook (FB) IPO disaster -- which was handled by competitor Nasdaq OMX (NDAQ) -- led to a near drought in the U.S. IPO market. We discuss below a few key metrics that influence our $34 valuation of NYSE Euronext’s stock.
IPOs Pick Up Again
Although Nasdaq is traditionally considered the preferred destination for technology companies, NYSE has led the march this year. The exchange listed 16 new technology companies, representing 53% of the country’s technology IPOs in the first half of the year. One such tech company is ServiceNow, Inc. (NOW), which became the first tech company to go public since Facebook.
NYSE has led the overall market, raising proceeds of $17.1 billion through a total of 56 new IPOs in the first half of the year. Although uncertainty regarding the global economic condition has deterred several high growth companies from going public, the JOBS Act passed by the Obama administration has eased regulations on smaller companies. NYSE's Big StartUp program is aimed at promoting awareness among small businesses. In comparison, Nasdaq filed 50 emerging growth companies under the provision this year. It will be interesting to see the impact that NYSE's initiatives have on the market, which went through a lull period following the Facebook saga.
Channel the Dark Side
Another interesting point is the progress in the development of the Retail Liquidity Program (RLP). Although the SEC has approved the program, which will allow trading firms to participate in retail trades outside the traditional marketplace, it has been criticized heavily by the industry. Peers have suggested that the platform lacks transparency and promotes so-called dark pool trading.
Dark pool trading, or private trading outside the traditional exchanges, has increased from 15% to 35% of total volume since the economic crisis began in 2008. The RLP, which will be closely monitored by the authorities, might help bring some regulation to this trade and will also give NYSE a sizable share of the market.
Meanwhile, in Europe
With Europe going through an economic transition period, derivative trading has taken precedence over cash products. NYSE Liffe and Deutsche Boerse AG’s Eurex currently dominate the European derivatives market, holding a near duopoly in the region. Having fallen short in its bid for the London Metal Exchange, NYSE set up a regulated exchange, NYSE Euronext London, in its namesake city to augment its European operations. (See "NYSE Euronext Answers London Calling With Rival Exchange.") The company’s performance in Europe will have a significant influence on its stock as derivative trading accounts for 41% of our valuation.
NYSE is planning to migrate clearing services from derivatives markets in Amsterdam, Brussels, Lisbon, and Paris to a central counterparty clearing house (CCP), NYSE Clearing. This move will be of particular importance in the coming years as the U.S. Commodity Futures Trading Commission (CFTC) and the European Securities and Markets Authority (ESMA) are planning to make clearing for over-the-counter (OTC) swaps mandatory. We will keep a close eye on further developments in this regard.
NYSE has been boosting its technological offerings, targeting tech revenues of $1 billion over the next three years. The company recently unveiled plans to stream data on trades from its exchanges through television broadcasters. Developments in the technological division, which accounts for 13% of our price estimate of the company’s stock, will also help NYSE attract customers for its core operations.
Our price estimate for NYSE Euronext’s stock is $34, approximately 30% above the current market price. You can gauge the effect of a change in our forecast by modifying the interactive charts above.
Disclosure: No positions.