The UK stock market has been unpopular recently with businesses. Arm Holdings elected to list in the US and TUI is considering delisting from the UK.
This might look like a problem for the The London Stock Exchange Group (LSE:LSEG). But equities markets are only 3% of the company’s revenue nowadays – so where does the rest come from?
Business structure
The short answer is that it comes from a lot of places. But the biggest source of revenue, by some distance, is its data and analytics division.
In 2021, the London Stock Exchange Group acquired the business formerly known as Refinitiv for $27bn. This provides trading data and information to banks and hedge funds, but also central banks and wealth managers.
The company’s data has three important properties. First of all, it’s mission critical, which means that its customers realistically can’t do without it.
Second, it’s relatively low cost. Prices to customers aren’t that high compared to the value they get from it, which makes them unlikely to dispense with the product.
Third, it’s extremely difficult to replicate. Pulling data from the London Stock Exchange gives the Group’s analytics platform something that its competitors can’t emulate.
As a result, demand seems likely to remain strong for the foreseeable future. And I think the data business also has some important growth catalysts going forward.
Growth
As with data businesses in general, I think the emergence of artificial intelligence could be a significant boost for the company. AI learning relies on data and this is the London Stock Exchange Group’s real strength.
It’s also worth noting that the company is partnered with one of the best in the business. As part of a strategic partnership, Microsoft is a 4% owner.
Arguably, no firm in the world is in a stronger position when it comes to generative AI. So with the US tech giant on board, the London Stock Exchange Group looks well-placed to capitalise on growth in demand for data.
There are some risks to consider, though. The company’s profitability is still being impacted by acquisition costs from the Refinitiv merger back in 2021.
In addition, the company still has debt on its balance sheet that is coming down slowly. Investors will need to hope these subside soon in order to justify the current share price.
Outlook
The shift from being an exchange business to a data and analytics company has been huge. In my view, it has significantly boosted the firm’s future prospects.
Shifting the firm from reliance on an exchange business that is currently unpopular with companies to a data operation that is, I think, a great move. I’m optimistic for the firm going forward.
I think long-term investors should think seriously about shares in the London Stock Exchange Group. It looks like a company with impressive advantages that I expect to pay off over time.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
