CBOE has been aggressive in their strategy to gain market share in the European segment, which is a small portion of their revenues. They compete in the Clearing and Equities business in Europe. In 2022 their market share rose and increased a lot in European Equities from 18% in 2021 to 23% in 2022. Their EBITDA margin in the Europe and Asia segment dropped from 38% to 50% and one reason is because their clearing fees dropped 17%. Also, CBOE competes with Euronext on the listing of Blue chip stocks. It seems to me CBOE is being very aggressive in Europe.
Regarding their clearing, settlement and custody business, since 2014 is possible for other CSD's to offer their services in Euronext markets and vice versa. Euronext can also offer their services outside their markets.
Besides the competition you mentioned in their cash equity market, they also have strong competition in the Fixed income side of the business, mostly on the retail side.
You mention Euronext has pricing power, but how did you conclude that? Also, it's hard for me to understand where is their moat, their competitive advantage. Can you explain better?
Also, their ROE has been down a lot since around 2015 from over 30% to around 10%. Do you have any explanation for that?
CBOE strategy is clearly hurting their own EBITDA margin so not sustainable in the long run in my view.
In regards to pricing power at Euronext, this is going to materialize in the non volume related part of the business (which is becoming more important). In 2024 I suspect pricing in non volume related activities will be be up at least mid single digit, as some businesses price up based off off prior year CPI (ie 2023). Hope it’s helpful.
I am thinking that CBOE doesn't care if 7% of their Revenues have a low margin if they can gain market share, get trades and sell the data through their subscription service. Also, maintaining 38% EBITDA margins is sustainable because their largest segment (Options) has 78% margins. They can have an unsustainable segment that is compensated by a sustainable segment.
I still don't understand their pricing power. They have tough competition in a lot of their revenue segments and regulators are enabling more competition. Their only advantage is the fact that they have almost a free pass to do M&A in Europe.
I am not close to CBOE enough to comment, I’ll take a closer look thank you. Nonetheless I am unsure whether “maintaining 38% margins” is viable by growing the biz that has already 78% margins. Eventually regulators/clients or competitors will push back.
With regards to pricing, I explained the best I could. I suggest you look closer on the non volume related businesses, some of which are data assets raising prices.
In this mad scramble for growth, Euronext has destroyed the RoE and margins. Unless all the fangled synergies of Borsa Italiano are so enormous that they would magically restore Euronexts' RoE to pre-acq levels, you have think this as a horrible capital allocation. The stock's low P/E is a reflection of this and with RoEs resetting structurally lower, the P/Es too have reset structurally lower versus peers. Hence it is no use comparing it to LSE or Deustsche Bourse etc and bemoaning its optical cheapness
Thanks for reading and apologies for the delay in my response, I only just saw this. I believe it is inaccurate to say that ENX destroyed margins, in fact they remained stable for a decade.
In an environment of 0% rates, it made sense to deploy the B/S and consolidate the industry.
It remains to be seen how capital will be deployed in the coming years, now that rates are back to normalized levels. Certainly the valuation reflects a rather pessimistic scenario.
This was a really good write up and breakdown.
Fantastic research mate. Thanks for sharing. Keep up the good work.
solid! thanx a lot
Still don't know why I sold them a couple of months ago ._.
Hi, Thank you for your excellent analysis.
CBOE has been aggressive in their strategy to gain market share in the European segment, which is a small portion of their revenues. They compete in the Clearing and Equities business in Europe. In 2022 their market share rose and increased a lot in European Equities from 18% in 2021 to 23% in 2022. Their EBITDA margin in the Europe and Asia segment dropped from 38% to 50% and one reason is because their clearing fees dropped 17%. Also, CBOE competes with Euronext on the listing of Blue chip stocks. It seems to me CBOE is being very aggressive in Europe.
Regarding their clearing, settlement and custody business, since 2014 is possible for other CSD's to offer their services in Euronext markets and vice versa. Euronext can also offer their services outside their markets.
Besides the competition you mentioned in their cash equity market, they also have strong competition in the Fixed income side of the business, mostly on the retail side.
You mention Euronext has pricing power, but how did you conclude that? Also, it's hard for me to understand where is their moat, their competitive advantage. Can you explain better?
Also, their ROE has been down a lot since around 2015 from over 30% to around 10%. Do you have any explanation for that?
Hi, Thanks for your comments.
CBOE strategy is clearly hurting their own EBITDA margin so not sustainable in the long run in my view.
In regards to pricing power at Euronext, this is going to materialize in the non volume related part of the business (which is becoming more important). In 2024 I suspect pricing in non volume related activities will be be up at least mid single digit, as some businesses price up based off off prior year CPI (ie 2023). Hope it’s helpful.
wow, thank you for the quick answer.
I am thinking that CBOE doesn't care if 7% of their Revenues have a low margin if they can gain market share, get trades and sell the data through their subscription service. Also, maintaining 38% EBITDA margins is sustainable because their largest segment (Options) has 78% margins. They can have an unsustainable segment that is compensated by a sustainable segment.
I still don't understand their pricing power. They have tough competition in a lot of their revenue segments and regulators are enabling more competition. Their only advantage is the fact that they have almost a free pass to do M&A in Europe.
I am not close to CBOE enough to comment, I’ll take a closer look thank you. Nonetheless I am unsure whether “maintaining 38% margins” is viable by growing the biz that has already 78% margins. Eventually regulators/clients or competitors will push back.
With regards to pricing, I explained the best I could. I suggest you look closer on the non volume related businesses, some of which are data assets raising prices.
In this mad scramble for growth, Euronext has destroyed the RoE and margins. Unless all the fangled synergies of Borsa Italiano are so enormous that they would magically restore Euronexts' RoE to pre-acq levels, you have think this as a horrible capital allocation. The stock's low P/E is a reflection of this and with RoEs resetting structurally lower, the P/Es too have reset structurally lower versus peers. Hence it is no use comparing it to LSE or Deustsche Bourse etc and bemoaning its optical cheapness
Thanks for reading and apologies for the delay in my response, I only just saw this. I believe it is inaccurate to say that ENX destroyed margins, in fact they remained stable for a decade.
In an environment of 0% rates, it made sense to deploy the B/S and consolidate the industry.
It remains to be seen how capital will be deployed in the coming years, now that rates are back to normalized levels. Certainly the valuation reflects a rather pessimistic scenario.