Stock of the day: ASX Limited

(AI video summary)

This video was created on 23 December for IG audiences by ausbiz.

ASX code: ASX

ASX Limited's faces challenges with technology and market position

ASX Limited, the operator of the Australian Securities Exchange (ASX), recently faced significant operational challenges due to a software glitch that halted the settlement of transactions. This issue, which occurred late last week, required extensive efforts over the weekend to resolve. The glitch affected the critical settlements processing system, causing a delay in the settlement of trades made last Wednesday.

Despite this setback, ASX Limited's share price saw a modest increase of 1% today. However, the incident highlights the ongoing need for technological upgrades, particularly concerning the long-delayed Clearing House Electronic Subregister System (CHESS) replacement system.

High valuation alerts investors

The current market valuation of ASX Limited raises concerns among analysts, with the company trading at a price-to-earnings (P/E) ratio of around 26 times. This valuation is considered high, especially for a firm that needs significant investment in new technology to maintain its market position.

The recent software issues have underscored the risks associated with relying on outdated systems. Analysts from Ord Minnett have issued a 'lighten' recommendation, suggesting that investors should consider selling some of their holdings. The stock is currently trading around $65, with a target price of $60.70, indicating potential downside.

Rising competition in the exchange market

ASX Limited holds a near-monopoly on Australian trade listings, which has traditionally supported its premium valuation. However, the company's inability to deliver reliable technological solutions poses a threat to its market dominance. The government has indicated the possibility of opening up the market if ASX Limited fails to improve its operations.

This threat is compounded by the presence of larger, better-funded exchanges with advanced systems ready to compete. Despite these challenges, some positives remain, such as potential increases in merger and acquisition (M&A) activity and initial public offerings (IPOs). However, given the current downtrend and missed earnings expectations, analysts advise caution, recommending that investors lighten their positions or avoid the stock until further improvements are made.