Is CBOE Global Markets Stock A Buy?

CBOE Global Markets Inc (BATS:CBOE) is the company that owns the Chicago Board Options Exchange and BATS Global Markets exchange. Between them, these exchanges generate billions in revenues. The CBOE continues expanding to compete with NASDAQ and other Wall Street-based exchanges.

The company enables a wide range of trading options, which has investors asking: is CBOE Global Markets stock a Buy?

Exchange markets are popular during economic highs and lows. They are the necessary gateway to execute and track market trades. The CBOE facilitates options trading, which permits more elaborate trading strategies.

This market has existed for many decades and derives its revenues primarily from fees from each transaction; these are the meat and potatoes of the company’s top line results.

Given how embedded it is in the financial system, is CBOE is a good investment?

CBOE Global Markets: The Bird’s Eye View

CBOE Global Markets is a global exchange operator. It enables the trading of U.S. and European equities, foreign exchange markets, and U.S. futures and options. Altogether, it facilitates an average of over $100 billion in daily trades.

Its claim to fame is its CBOE Volatility Index (VIX), which uses S&P 500 options to determine the overall market’s pricing volatility.

Because it operates as an exchange market, CBOE is an intermediary for trades. But it doesn’t perform the trades itself. It just offers a variety of trading strategies.

This puts it in a position to profit during good and bad markets. That’s because it doesn’t matter if you’re buying or selling – it takes a fee and generates revenue either way. As retail traders poured into the market in recent years and trading volumes have increased, CBOE revenues grew. 

Is CBOE Global Markets Stock A Buy?

CBOE Global Markets stock pays an annual dividend yield of $1.68, or 1.81 percent. It has paid out and raised its dividend consistently through the 2010s.

Its third quarter 2020 earnings report showed net revenue of $292 million and adjusted earnings per share (EPS) of $1.11. Both were down year-over-year, but the company still returned $88 million to shareholders through stock repurchases and dividend payments.

CBOE earned $139.3 million in the quarter, a 5 percent decrease from the same quarter in 2019. Still, equities trading grew in the year as the S&P 500 and other market indices grew to all-time highs.

The company had $939.1 million in total debt heading into the 2020 holiday season, with $213.2 million cash liquidity to pay for it. Being upside down like this highlights possible risks of investing in CBOE Global Markets.

Risks of Buying CBOE Global Markets Stock

When markets plunged in 2020, CBOE share price dropped below $100 per share and took a full year to recover; unlike high profile technology stocks that forged to new highs.

Rising interest in stock markets didn’t translate to investor interest in the company itself after the crash.

CBOE also has to deal with intense competition on fees from rival exchanges. 

Although the S&P 500 rose to all-time high values, CBOE stock didn’t rise with it. So, the exchange doesn’t get a subsequent pricing increase when the trading options it offers rise in value.

The trend has been a year over year decline in fees – a race to the bottom so to speak of a commoditized product. Just as brokers have had to slash commissions, so too have exchanges chopped fees.

While the CBOE has a highly predictable and stable business model. If you want to trade options you must funnel money through the CBOE after all, the reality is the volumes must continually rise for CBOE to sustain revenues when prices decline.

Can CBOE Global Markets Competitors Win?

As an exchange market, CBOE’s competitors include the NYSE, Nasdaq, and London Stock Exchange, among others. Each exchange hopes to gain more revenues and market share, and they will have to take that from each other because the pie isn’t growing so fast.

The CBOE grew to prominence for its high volatility ETF index fund. Many of its high value trades are in options and futures. That’s a genie in a bottle that is hard to recapture and create twice.

From a customer perspective, the competition among exchange markets is a good thing for retail traders. It keeps transaction fees down and saves you money overall. For investors it works in reverse.

It’s not likely that any of these markets will be overly acquisitive in snapping each other up through buyouts. Government regulators are the most likely antagonist for these market exchanges.

Is CBOE Global Markets Stock A Buy? Summary

CBOE Global Markets is an American company that owns and operates a variety of security and commodity exchanges. It offers options and futures trading, along with exposure in both U.S. and European equities markets.

The pandemic highlighted a problem with its business model though. Despite all its assets and high trading volumes, the company couldn’t recover from the initial crash. How the market performs is inconsequential to the stock’s trading price.

It’s a double-edged sword, because it’s sheltered from most negative market activity. But on the flipside, it also fails to benefit from positive market swings too. This made it underperform the rest of the market and S&P 500 average.

Still, it represents a potentially stable investment for bulls who believe in it over the long-term. As long as volumes increase and fees don’t get slashed too much, the predictability of its revenue streams is high.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.