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New Revenues Will Help NYSE Navigate Choppy Trading Environment
NYSE Euronext ( NYX ) reported a 12% decline in revenues and a 16% decline in net income in Q2 compared to the same period in the previous year. Lower trading volumes in derivatives as well as cash equities caused revenues to decline sharply in the second quarter. However, the non-trading related revenues such as market data, listing and technology services revenues increased by $18 million which reflects the increasing diversification of the company's sources of revenue. NYSE Euronext competes with Nasdaq OMX ( NDAQ ), CME Group ( CME ) and IntercontinentalExchange ( ICE ).
We have a price estimate near $34 on NYSE Euronext 's stock, which is about 10% above the current market price.
Volatile Trading Related Revenues
In the U.S. cash equities market, NYSE Euronext reported about a 35% decrease in trading volume on difficult comparisons as Q2 2010 benefited from higher levels of market volatility driven by the sovereign debt crisis in Europe as well as the flash crash in the U.S. This caused the trading related revenues to drop by 20% in Q2 2011.
Trading related revenues were also higher than average in Q2 2009 due to increased market volatility during global economic crisis. NYSE Euronext's trading related revenues in Q2 2011 are more in-line with its Q2 2008 level when the markets were normal. About 70% of NYSE Euronext's revenues are trading related which depend upon volatility in the equity markets and thus are themselves quiet volatile.
Diversifying Revenue Sources
NYSE is quietly growing its non-trading related revenues which are less volatile in nature. Its listing revenues are growing at an annual rate of about 5%, and for the second consecutive quarter, NYSE Euronext is globally #1 for IPOs and has won 55% of the total technology IPOs this year.
The company's information and technology services revenues are also growing more rapidly at above 30% a year for the past three years due to huge investments in technology which help NYSE to provide better connectivity to its clients.
NYSE Euronext's equities and derivatives trading account for just under 90% of our valuation and remain the ultimate driver of the stock; however, we believe that the growth in technology solutions will help the company weather a volatile trading environment.