Key Takeaways
- Despite a year over year rise in London Stock Exchange Group’s income and profits, its stock price has fallen 25%.
- LSEG is facing competition from new AI models and rivals like Bloomberg.
- Recent negative news about listings and IPOs includes a possible move by AstraZeneca from London to the New York Stock Exchange.
The London Stock Exchange Group’s LSEG share price has fallen by a quarter this year, making the stock one of the worst performers in the UK market in Q3.
Investment confidence has increasingly waned, as investors weigh up the likely impact of the artificial intelligence boom on LSEG’s data and analytics division.
The dramatic fall in LSEG stock leaves the company, which owns the UK’s main stock market, on track for its worst annual share price fall since 2008, when it fell 73.25% at the height of the financial crisis.
LSEG is the 15th largest company in the UK and owns the UK’s main stock market, which dates back to 1801.
While its stock price has had a staggering run since 2021, rising 2,500%, the last five years have been a struggle. On a total returns basis, LSEG stock has barely moved since 2020, contrary to the overall performance of both global and UK markets.
Data Dominates LSE’s Key Divisions
- The data and analytics makes up nearly half the group’s annual income.
- FTSE Russell owns the FTSE 100 and other benchmarks.
- The London Stock Exchange is part of the group’s capital markets division.
- Risk intelligence is the smallest part of the group in terms of income.
From an investor’s point of view, the stock market is the most high-profile division, especially given the importance of IPOs and listings. But the capital markets division, in which it sits, makes up just 22% of group annual income.
Here fund managers and analysts give their views on where they see the opportunities, and the risks for the stock.
AI Shake-Up: Opportunity or Risk for LSEG Investors?
Morningstar equity analyst Niklas Kammer says that LSEG is trying to ride the AI wave from its partnership with Microsoft MSFT, which has a 4% stake in the group and also has a strategic partnership with Open AI. Various Microsoft applications now integrate with LSEG products, for example.
But he is also skeptical about the ultimate impact of LSEG’s product development efforts with Microsoft.
And he says that investors are concerned AI providers will shake up existing financial data vendors and terminals.
“The idea is that AI engines are much better at providing open data from all kinds of sources to users, lowering the need for specialized unique proprietary datasets from providers like LSEG,” Kammer tells Morningstar UK.
As well as competition from new AI models, Kunal Kothari, fund manager of the Neutral-rated Aviva UK Listed Equity Income Fund, believes that LSEG’s data and analytics division is facing an intensification of competition from traditional rivals like Bloomberg.
One way LSEG is tackling this is by signing data access agreements with investment banks like Barclays and most recently, Switzerland’s UBS.
“How LSEG is attacking this market is by packaging everything together. But the way it appears that Bloomberg is trying to defend itself is by bringing its prices down,” he says.
One investor told Morningstar that the market has grown impatient to see results from LSEG’s partnership with Microsoft, which is now three years’ old.
IPOs Are Drying Up in London’s Stock Market
In the capital markets division, recent newsflow has been negative.
In early October, the UK’s biggest stock, AstraZeneca AZN said it would shift its listing in New York to a direct one. A raft of other high-profile stocks have either shifted their primary listings to the New York Stock Exchange or chosen to go public there: UK-based Arm Holdings ARM, which makes chips for Apple iPhones, chose New York over London to float and its shares have risen 150% since.
In terms of IPOs, less than £200 million was raised on the London Stock Exchange in the first nine months of this year, pushing the UK down the global rankings for capital raisings.
Stephen Yiu, manager of the Neutral-rated Blue Whale Growth Fund, says that one option that LSEG could consider is disposing of its capital markets division altogether, and focusing on data and analytics.
However, the stock exchange’s chief executive Julia Hoggett recently told a Bloomberg event that the exchange is not for sale.
What’s the Bull Case for London Stock Exchange Group?
The latest financial results show little sign of weakness at an operational level.
At the half-year stage LSEG reported a 43% increase in pretax profits to £991 million from £693 million. Total income was up nearly 7% to £4.6 billion. Basic earnings per share are up nearly 90% at 122p.
All of LSEG’s divisions posted growth over that same period, with data and analytics growing 5.1%, FTSE Russell increasing by 7.6%, risk intelligence rising 12.2%, and capital markets up by 10.7%.
The equity research team at RBC said there was mismatch between these results and the share price reaction this year.
“First-half results showcased several positives, including strong numbers, higher capital returns and reaffirmed (or slightly improved) guidance. These developments have been washed out of the share price by [investor] concerns. Whilst the concerns may be rational, the extent of the reaction is not in our view.”
Fund manager Nick Train holds LSEG in the Finsbury Growth and Income Trust FGIT, which has a Morningstar Medalist Rating of Bronze. The company makes up just over 10% of the investment trust’s portfolio.
“AI-enhanced productivity and analytic tools are being developed within LSEG, combining its unique data assets and Microsoft’s capabilities. When these products are ready for commercial release, we hope they will be game-changing and present a formidable challenge to competitors established and new,” he said in FGIT’s fact sheet in July.
LSEG is also one of the top 10 holdings of Pieter Fourie’s Neutral-rated Sanlam Global High-Quality Fund. Fourie is bullish on LSEG, due to the diversification of its business, pointing to the success of fixed income data provider Tradeweb and its indexing business FTSE Russell, which owns the FTSE 100.
Is Now a Good Time to Buy LSEG Stock?
Morningstar’s Kammer maintains a fair value estimate of £112 on LSEG stock, which is trading at £85.96 as of Oct. 3.
It has a 4-star rating, meaning the stock is undervalued. He says the group has a wide economic moat, because it controls key global assets, ranging from equity, fixed-income to foreign-exchange trading.
The company’s data and analytics business also has a wide moat, based on switching costs surrounding the depth and breadth of data and trading solutions delivered via its terminals and direct connection feeds.
James Gard contributed to this article
