Established in 2000 as a culmination of the European construction movement, Euronext NV (XPAR:ENX, Financial) emerged through the merger of three key exchanges: Paris, Amsterdam and Brussels. This transformational merger introduced a novel federal model characterized by unified rules and a single order book, all supported by a common electronic trading platform and the robust clearing services of LCH SA central counterparty.
A major turning point arrived in 2006 when Euronext joined forces with NYSE Group, resulting in the birth of NYSE Euronext. The amalgamation led to the listing of the combined entity on both the New York Stock Exchange and Euronext Paris, marking a significant step toward global market integration.
Independence and expansion
The year 2013 saw the acquisition of NYSE Euronext by Intercontinental Exchange Inc. (ICE, Financial), leading to the pivotal separation and subsequent initial public offering of the continental European exchanges. This marked the inception of Euronext N.V., an independent publicly traded company since June 2014.
Euronext's growth trajectory continued through strategic acquisitions, including the addition of the Irish Stock Exchange (Euronext Dublin) in 2018 and the Oslo Børs in 2019, expanding its presence across Europe. Notably, 2020 brought Euronext's acquisition of a majority stake in Nord Pool, a prominent power trading infrastructure across Nordic, Baltic, and Central and Western European regions, effectively diversifying its asset classes.
Recent acquisitions and strategic plan
The year 2021 witnessed Euronext's landmark acquisition of 100% of the issued share capital of London Stock Exchange Group PLC (LSE:LSEG, Financial) holding Italia S.p.A., consolidating its position in post-trade activities, particularly in clearing.
Following the transformative Borsa Italiana deal, Euronext unveiled its ambitious three-year strategic plan called "Growth for Impact 2024." With its footprint encompassing seven national markets, four central securities depositories and a multi-asset clearing house, Euronext now commands a comprehensive grasp over the entire capital markets value chain, a remarkable achievement since its IPO.
Key priorities of the strategic plan
Built on a robust foundation, the "Growth for Impact 2024" strategy centers around several key priorities: harnessing Euronext's integrated value chain, enhancing the pan-European presence of its central securities depositories, further solidifying its leadership in the European market, facilitating sustainable finance and executing value-creating mergers and acquisitions.
Second-quarter results and revenue diversification
Second-quarter results, unveiled at the close of July 2023, underscored Euronext's solid performance, underpinned by organic growth in non-volume related businesses.
While contrasting with the London Stock Exchange Group, which heavily relies on its data and analytics segment, Euronext boasts a more diversified revenue stream, as highlighted by the accompanying pie chart. The growth trajectory of its Technology Solutions and Advanced Data Services is particularly noteworthy. Given the new emphasis on data's significance, these areas hold pivotal relevance for the group's prospects.
Emphasis on data services
Central to Euronext's data-centric approach is its Advanced Data Services business, responsible for disseminating and selling real-time, historical and reference data to global data vendors, financial institutions and individual investors. As a preeminent indices provider with nearly four decades of experience, Euronext is known for its benchmark indexes, including those for France, Belgium and the Netherlands. Additionally, it offers advanced analytics products, fostering an ecosystem of informed decision-making for its investor and financial institution client base.
Euronext's data outreach extends via data vendors and direct channels to financial institutions and service providers globally. The year 2022 witnessed heightened utilization of Euronext data in automated trading applications. Beyond real-time market data, the organization also extends services encompassing daily historical data, reference corporate action data and end of day index data.
A notable innovation from 2019, Market Flow provides insights into daily trading flows on the cash order book. Anchored in Euronext's proprietary data and anonymized aggregation, Market Flow's analytical products cater to a burgeoning demand and expanding client base.
Presence across the value chain
Euronext's distinctive advantage lies in its presence across the entire value chain of capital markets. Operating seven national markets, a multi-asset clearing house and four central securities depositories across Europe, the group's capability to oversee the complete capital markets value chain and this sets it apart from competitors. This strategic positioning facilitates the alignment of priorities between trading and post-trade activities, fostering innovation for clients' benefit.
Strength in derivatives and fixed income
In derivatives, Euronext's prowess is evident in equity derivatives, spanning conventional equity index products to sophisticated dividend and total return derivatives. It also boasts a strong standing in commodity derivatives, including significant contracts like Wheat and Power.
Fixed Income showcases Euronext's strength through MTS, a premier regulated electronic platform for European wholesale government bonds and other fixed income securities.
Operational risks
Yet, amid these achievements, Euronext operates within a landscape of inherent financial and operational risks. Market volatility, regulatory shifts, competition from other European exchange groups like London Stock Exchange and Deutsche Boerse AG (XTER:DB1, Financial), the rise of blockchain technology and the ever-present threat of cyberattacks collectively pose challenges. Euronext's revenues can be impacted by changes in market volatility, regulatory dynamics or operational disruptions from cyberattacks.
Embracing fintech innovations
To proactively address emerging fintech competition, Euronext invests in innovative solutions such as Tokeny Solutions, which specializes in tokenization on public blockchains. Artificial intelligence also takes center stage, enabling improved data analysis and infrastructure agility.
Financial performance and outlook
The integration of the Borsa Italiana is set to create over $100 million in annual Ebitda synergies, up from over $50 million already achieved. The disposal of Euronext’s 11.1% stake in LCH SA for $120 million enables the group to start a $220 million share buyback, which management says will preserve Euronext’s financial flexibility to capture market opportunities and its existing dividend policy of 50% of net income pay-out.
The stock is rated modestly undervalued by the GF Value Line.
It also has a very high GF Score of 92 out of 100, indicating the highest level of outperformance potential. The stock has a decent Piotroski F-Score of 7 out of 9. As a financial institution subject to regulatory capital requirements, the Alman Z-score may not be an appropriate metric to consider at face value. The stock scores a profitability rank of 10 out of 10 as many fees are sticky and the group has very strong positions in its markets, with two-thirds of market share across its core segments. The value rank of 9 out of 10 might reflect the fact other names in its peer group have been bid up thanks to a clearer data or artificial intelligence story. So this potentially provides opportunities for investors who are optimistic about the European project and Euronext’s ability to capture even more market share and innovate.
Conclusion
Euronext's journey from its inception to the present exemplifies a tale of dynamic growth and strategic adaptation. Its commitment to data-driven expansion, bolstered by a resilient presence on the entire value chain, positions Euronext at the forefront of the ever-evolving financial landscape. With a comprehensive suite of offerings, a diversified revenue model and a proactive approach to innovation, Euronext's future trajectory promises continued leadership and impactful growth.
