Cboe rallies after Morgan Stanley double upgrade points to durable options growth

Cboe Global Markets Inc (CBOE) experienced a 3.6% surge in its stock price during Friday's pre-market trading following a significant double upgrade from Morgan Stanley. Analyst Michael Cyprys lifted CBOE's rating from Underweight to Overweight, and significantly boosted his price target from $258 to $358. This strong performance is attributed to improved risk-reward prospects and the resolution of long-term uncertainties.

The key driver behind this upgrade is the extension of Cboe's licensing agreement with S&P Dow Jones Indices through 2051. This decades-long deal is crucial as it secures Cboe's lucrative proprietary SPX index options business, eliminating a significant valuation concern. Morgan Stanley also addressed competitive threats, stating that concerns about market disruption from perpetual futures are overstated compared to Cboe's core derivatives economics.

Additionally, CBOE's multi-list and index options trading volumes have proven more resilient than initially anticipated, providing a solid foundation for sustained organic revenue growth. The exchange's planned venture into company-specific KPI prediction markets also holds substantial upside potential, currently unpriced by market expectations.

With $826 million in net cash, Cboe maintains strong balance sheet flexibility to fund innovation, strategic initiatives, and shareholder returns. Currently trading at 17.6 times projected 2027 earnings, the stock offers a 4.4-turn discount to its three-year historical average P/E multiple of 22.0x. Morgan Stanley projects that this valuation gap will narrow as trading volumes accelerate, forecasting a 5.8% top-line compound annual growth rate through 2028 and a 10.2% annual earnings per share increase.