Global tech giant Microsoft NASDAQ:MSFT moved this week to take a stake in London Stock Exchange Group LON:LSEG worth GBP 1.5bn in a deal that gives it a 4% position, yielded by Blackstone NYSE:BX among other investors, who seem to have lost the faith. It is a significant move by the tech giant which has revealed its ambition to get more involved in the world of trading exchanges.
The move marks the start of a 10 year strategic relationship, which could bring much-needed technological know-how into LSEG’s arsenal.
The shares had been trending up going into the announcement of the deal. We saw LSEG stock move up from £72.92 to hit a peak of around £82.70 in recent trading days. Significantly investors have not greeted it with massive enthusiasm, we suspect because of the decision by Blackstone to exit its position. Shares have traded down this week, hitting £73.80 before rallying again. LSEG shares remain well off their six month highs.
Why Microsoft and why now?
LSEG is in need of a major facelift. Scott Guthrie, who is Executive Vice President of the Microsoft Cloud and AI division gets a seat on the LSEG board as part of the deal. Microsoft is obviously having something of a ‘me too’ moment following the tie up between Google and the CME last year, with Google writing a $1 billion cheque to get into CME.
LSEG is also under pressure to make its acquisition of Refinitiv count. CEO David Schwimmer reckons the deal is “a step change in terms of how financial markets participants will interact with each other, with their data.”
LSEG also said it would be spending £2.3bn at Microsoft over the next 10 years, although it also confirmed it would continue to work with other cloud computing companies.
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How do LSEG shares measure up?
Several big investors are selling out to Microsoft as part of this deal, among them Thomson Reuters and the Canada Pension Plan Investment Board. Singapore-based sovereign wealth fund GIC also sold out. Some investors will be wondering whether they should follow suit.The fundamentals underpinning LSEG stock still look pretty sound, signalling that an exit right now may be short-sighted. The PE ratio of 44.9x is still a tad expensive for our tastes however,
“At a high level, the metrics from London Stock Exchange’s Q2 financial report release provided many positive indicators,” said Deshe Analytics in a recent report. “Their positive income and value factors indicate that it is likely to continue to produce impressive results for the foreseeable future, as well. We expect that this positive performance will continue in the coming months, and anticipate that London Stock Exchange will maintain good momentum even in a challenging environment.”
Excellent balance sheet and cash flow
LSEG still sports a sector beating balance sheet and excellent cash flow metrics. The company appears likely to maintain its strong balance sheet metrics and momentum going forward. It is doing a good job of keeping its liabilities under control and growing intelligently. At filing, LSEG’s liabilities were closely aligned with their assets, representing a 0.0% change from the previous period. This performance is all interesting relative to their peers and suggests that the LSEG stock price has room to grow to reflect a higher intrinsic value.
If you are a shorter term investor you’ll be looking at that share price chart and associated technicals wondering when to time an entry. Technically LSEG stock still looks a tad pricey and it has lost some of its trend-like characteristics. It should be noted the stock has not returned to pre-pandemic highs which suggests that there are still some issues, not all fully disclosed, which need to be worked out. Look out for near term lows at £63 or £55 as potential entry points for the shares if you are not in already.
