ICE, innovation and a cool $12 trillion

If you’re going to invest in innovation, why not go with a company that’s proven they’re good at it? In this video/article, Platinum Investment Analyst, Manroop Singh, tells the story of Jeff Sprecher, a serial innovator who’s upending the US$12 trillion US mortgage market - and explains why we’re investing in his company, Intercontinental Exchange (NASDAQ: ICE).

Jeff Sprecher, a chemical engineer by training, got his start in the newly deregulated US electricity market in the late 1980s, where he saw the opportunity to drag its business practices into the late 20th Century – at that point, excess power supply was still traded over the phone.

Sprecher bought a Georgia-based company called Continental Power Exchange for $1 (and the company’s debt). As you can tell from the price, the business was struggling, but it did have an electronic trading network. Today that company – now called Intercontinental Exchange – is worth US$113 billion.(1)

The serial innovator

That one purchase set ICE on a path of serial innovation. The ICE ‘playbook’ is to seek out markets which are inefficient, analogue and opaque and revolutionise them by making them more digital, transparent and efficient. All of which should make them more profitable.

ICE have been running that innovation game for decades:

• In the early 2000s ICE bought the International Petroleum Exchange (IPE). Within a few years, it had shut down the historic trading pits at the London exchange and brought in computerised trading.
• ICE acquired the NY Board of Trade (a commodity futures exchange and the location for the Eddie Murphy movie Trading Places) in 2007.
• In 2013 it bought the iconic New York Stock Exchange. By 2016 it had installed a new integrated trading platform that later enabled it to continue trading without an active trading floor during Covid.

Today ICE is, in its own words, a “massively scalable network and database company”. It operates 12 exchanges, six clearinghouses, a data services business and runs a wide array of trading tools, technologies and platforms built on their technology stack.[2]

It’s also been a long-term winner for investors. Since it began trading in November 2005, ICE has generated an average total return of 18% per year [3]

The ICE house

Whilst ICE has a storied past, it’s the company’s next big target that convinced Platinum to buy into the stock. The company is re-engineering the complex, time-consuming, paper-chewing business of buying a home in the US. It’s a vast $US12 trillion market that Jeff Sprecher told Fortune magazine is “the biggest untapped opportunity in financial services.”[4]

To execute this vision, ICE has been buying up market-leading providers in loan origination, closing, pricing and servicing. The company believes integrating all these pieces will allows ICE to capture more customers and lower the cost of getting a mortgage in the US. ICE will clip the ticket along the way – but it will also develop trading products and indices off the back of those new mortgage systems that generate additional revenue.

A very Platinum purchase

ICE – and its latest mortgage move - represent a compelling investment opportunity.

• ICE is a highly innovative business – and it’s been an innovative business for a long time. That gives us confidence it can execute on its mortgage-market expansion.
• The underlying prize – the addressable market for ICE’s mortgage services - is huge and growing. ICE expects their mortgage business to grow at least 8-10% pa for the next decade and it estimates the overall revenue opportunity in their mortgage business at ~US$14bn.

Finally, and importantly for Platinum, the opportunity to invest in ICE was both cyclical and structural. We could buy our stake in ICE at an undemanding price at a time when the US mortgage market was at a cyclical low and struggling under the weight of rising interest rates. That reduces risk as the company’s performance (and share price) has room to improve as the mortgage market normalises. ICE also offers us a structural opportunity as it seeks to reshape the US mortgage market - and reap the rewards.

Written by Manroop Singh, Investment Analyst

As at May 2024 ICE was a holding in the Platinum International Fund.

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Like to know more?

Look out for the next two video/articles in our Innovation Series – featuring Walmart and the London Stock Exchange here.

Take a look at our recent video, The Lure of Large Numbers, to see other businesses Platinum is investing in that play in huge markets.