London Stock Exchange Group (LSE: LSEG) has been one of the best growth shares in the FTSE 100 in recent times. Over the last five years, the stock has risen around 100%. Over the last 10, it has climbed about 430%.
Can the shares continue to deliver attractive returns for investors from here? I think so. Here’s a look at why I’m bullish on the Footsie giant.
A data powerhouse
London Stock Exchange Group has undergone a huge transformation recently. Thanks to its acquisition of Refinitiv in 2021, it’s now one of the biggest providers of real-time financial data in the world.
This shouldn’t be overlooked.
For starters, revenues from this side of the business now account for the majority of its top line.
Secondly, a lot of revenues are recurring in nature (investment firms need this data on an ongoing basis).
Third, the company should also have the ability to regularly raise its prices and increase its revenues over time.
What this means is that London Stock Exchange Group’s top line is likely to continue growing in the years ahead. At present, City analysts expect revenue growth of 6.4% this year.
Embracing artificial intelligence
The data story doesn’t end there, however.
In late 2022, London Stock Exchange Group announced that it had entered into a 10-year, multi-billion dollar strategic partnership with tech giant Microsoft (Microsoft took a 4% stake in the company).
The aim of this partnership is to combine London Stock Exchange Group’s data and analytics tools with Microsoft’s cloud and artificial intelligence (AI) capabilities to develop powerful new generative AI-based solutions for customers in the financial industry.
These solutions (think ChatGPT for banks and investment managers) will allow firms to gain more insights and value from their data. So, they could be an extra revenue driver.
In light of this focus on data and AI, the growth runway here appears to have plenty of room to run.
Valuation risk
Now, like a lot of growth/tech stocks, London Stock Exchange Group does have a relatively high valuation.
Currently, it trades on a forward-looking price-to-earnings (P/E) ratio of about 24.9, using the earnings forecast for 2024 (367p per share).
This valuation definitely adds some risk to the investment case.
However, companies that have recurring revenues generally command higher valuations than those that don’t. This is because their earnings tend to be more stable and predictable.
And I’ll point out that analysts at Jefferies just raised their target price for the shares to 11,000p from 10,000p. So, they clearly don’t see the valuation as a deal-breaker. That price target is around 20% above the current share price.
I’ve been buying
Given my positive view on the outlook here, I have been buying shares in London Stock Exchange Group for my own portfolio recently.
I started buying them in July last year and I have now made a total of four purchases. As a result, the stock is currently my ninth-largest holding.
I’m excited about the potential here.
