London Stock Exchange Group (LSE:LSEG) shares have served long-term investors well over recent years. The FTSE 100 financial exchange company is probably best-known for owning and operating the London Stock Exchange.
However, the firm’s data and analytics services are now the dominant sources of revenue, especially since the 2021 acquisition of financial software and risk solutions business Refinitiv from Blackstone and Thomson Reuters for £22.5bn.
So, what’s the outlook for the LSE Group share price? Are the shares worth buying today? Here’s my take.
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Strong position
First, let’s start with the numbers. The company’s Q1 trading update showed it made a good start to the year, delivering a 7.5% rise in total income on a constant currency basis (excluding recoveries).
Indeed, income growth is accelerating across several key divisions, although there was a slump in the company’s equities arm. The group’s post trade solutions saw a particularly impressive 16.8% improvement in income, driven by client demand to manage risk during a period of heightened volatility.
What’s more, the company restated its 2023 guidance, indicating it will likely continue in this vein as the year progresses. It anticipates it can deliver 6%-8% constant currency growth in total income and a healthy EBITDA margin of around 48%.
These encouraging figures haven’t escaped the attention of UBS analysts, who lifted their price target for the stock to £98 earlier this year. As I write, it trades for £80.32 and offers a 1.34% dividend yield.
One particularly attractive development is the group’s 10-year partnership with Microsoft that was announced in late 2022. The US tech titan will design the LSE Group’s data infrastructure and provide the company with AI and cloud-based analytics solutions.
As part of the deal, Microsoft has also taken a 4% stake in the company. That’s a promising sign that it has ‘skin in the game’ with regard to delivering positive financial results from the partnership.
Challenges
Despite good recent results, the group faces some key risks. For instance, it’s highly exposed to the broad performance of UK shares.
The FTSE 100’s return has been pedestrian compared to other leading stock market indexes this year, weighed down by sticky inflation and falling commodity prices. If British stocks continue to underperform, that could suppress further growth in the LSE Group share price.
In addition, sluggish IPO activity in London is another headwind. According to EY, IPO activity on the London stock markets fell 90% last year by proceeds and 62% measured by the number of listings. This trend has continued in 2023.
The capital has historically been one of the world’s leading financial centres and a highly attractive IPO destination. It still maintains that reputation today. However, if the IPO drought persists longer than anticipated, its prestige could potentially come into question.
A stock to buy?
Overall, I think LSE Group shares deserve serious consideration. The company’s long-term strategy looks solid and there are signs it’s already reaping some early rewards from its investments in data and analytics.
That said, the wider macro context isn’t easy for the company and investors would be wise to expect volatility ahead.
Nonetheless, I think the risk/reward profile looks good on balance. If I had spare cash, I’d invest in this company today.
