NASDAQ Stock Has Limited Upside

[Updated 01/07/2022] NASDAQ Stock valuation update

NASDAQ stock (NASDAQ: NDAQ) has gained 47% since the end of 2020, and at its current price of $195 per share, it is almost 9% below its fair value of $215 – Trefis’ estimate for NASDAQ’s valuation. While the exchange outperformed the street expectations in the third-quarter 2021 results, its stock has lost 2% in value since then. Its cumulative nine months net revenue (revenues less transaction-based expenses) increased 6% y-o-y in 2021, mainly due to higher non-trading revenues and lower transaction-based expenses. That said, the market services revenues (excluding the transaction-based expenses) were marginally down due to lower cash equity volumes. We expect the same trend to continue in the fourth quarter, as well. Notably, consensus estimates for fourth-quarter 2021 revenues and earnings are around $860 million and $1.74 respectively. 

The company’s top line (net revenues) increased 15% y-o-y in 2020. It was because of strong growth in both trading and non-trading revenues. The trading volumes in the first three quarters of 2021 were more elevated than the pre-Covid-19 levels. As a result, the exchange’s cumulative nine-month trading revenues were higher than the 2019 figure, but marginally below the 2020 levels. Further, non-trading revenues grew 22% y-o-y over the same period. We expect NASDAQ’s revenues to touch $5.9 billion for full-year 2021 (net revenues of $3.4 billion). Additionally, the company’s adjusted net income is likely to remain around the previous year’s level. This will result in an EPS figure of $6.09, which coupled with a P/E multiple of just above 35x, will lead to the valuation of $215.

Below you’ll find our previous coverage of NASDAQ stock where you can track our view over time.

[Updated 11/23/2021] NASDAQ Stock Is Trading Close To Its Fair Value

NASDAQ stock (NASDAQ: NDAQ) has gained 56% YTD, and at its current price of $208 per share, it is almost 3% below its fair value of $215 – Trefis’ estimate for NASDAQ’s valuation. The company recently released its third-quarter results, with revenues and earnings surpassing the consensus estimates. It reported net revenues (revenues less transaction-based expenses) of $838 million, which is 17% more than the year-ago period. This was mainly driven by lower transaction-based expenses on a year-on-year basis, followed by growth in the non-trading revenues. However, the company witnessed a 15% drop in the market services revenues, primarily due to a 29% decrease in the cash equity trading sub-segment. Notably, the average U.S matched equity volume declined 14% y-o-y in Q3. Overall, the growth in net revenues translated into a 9% rise in adjusted net income to $288 million.

The company reported $5.6 billion in the 2020 revenues, which was 32% more than the 2019 figure. This translated into net revenues of $2.9 billion – up 15% y-o-y. NDAQ benefited from the higher trading volumes in the year due to the Covid-19 crisis, increasing the net market services revenues by 21% y-o-y. It was followed by a 17% increase in the investment intelligence unit. Further, the net market services revenues for the cumulative nine months of 2021 increased 16% y-o-y due to lower transaction-based expenses. The same trend continued in the investment intelligence segment, with cumulative nine months revenues increasing 20% y-o-y. Overall, we expect the same momentum to follow in the fourth quarter, enabling NASDAQ’s revenues to touch $5.9 billion in FY2021 (net revenues of $3.4 billion). Additionally, the company’s adjusted net income margin is likely to remain around the previous year’s level. This will result in an EPS figure of around $6.09, which coupled with a P/E multiple of just above 35x, will lead to the valuation of $215.

[Updated 05/27/2021] NASDAQ Stock Has Limited Scope For Growth

NASDAQ stock (NASDAQ: NDAQ), a global financial exchange group, gained roughly 25% – increasing from about $133 at the beginning of 2021 to around $165 currently, outperforming the S&P500, which grew 12% over the same period. The exchange’s top-line has benefited from higher U.S. industry trading volumes in 2021, which is the main reason behind the favorable investor outlook toward the stock.

There were two main factors behind the jump in trading volumes: First, the approval of the $1.9 trillion stimulus package. Second, the higher level of engagement of retail investors.

But is this all there is to the story? 

Not quite, despite the recent gains, Trefis estimates NASDAQ’s valuation to be around $170 per share – slightly above the current market price – based on a key opportunity and one risk factor.

The opportunity we see is an improved trajectory for NASDAQ’s revenues over the subsequent quarters. The company’s revenues for the full year 2020 increased by 32% y-o-y to $5.6 billion, which translated into net revenues (revenues minus transaction rebates, brokerage, clearance, and exchange fees) of $2.9 billion – up 15% y-o-y. It was mainly driven by a 21% y-o-y rise in the net Market Services revenues due to higher trading volumes, followed by a 17% growth in the Investment Intelligence segment. 

The same trend continued in the first quarter of FY2021 as well, with the exchange posting better than expected results. NASDAQ reported revenues of $1.65 billion in the quarter – 22% more than the year-ago period. This translated into net revenues of $851 million – up 21% y-o-y, mainly driven by 22% growth in net Market Services revenues due to unusually high trading volumes, coupled with similar growth in the Investment Intelligence unit. Notably, the Market Services segment reported record quarterly trading volume in U.S. options and U.S. equities in the quarter. That said, higher trading volumes are expected to normalize with recovery in the economic conditions. But, till then, they will likely dominate NDAQ’s quarterly results. Overall, we expect NDAQ revenues to touch $6.1 billion (net revenues of $3.3 billion).

The operating expenses are likely to see a slight increase in FY2021, which is likely to partially offset the benefit of higher revenues. The company’s profitability figures for the year are likely to report a slight increase – EPS will likely improve from $5.59 to $5.71. The EPS of $5.71, coupled with the P/E multiple of just below 30x will lead to a valuation of around $170.

Finally, how much should the market pay per dollar of NASDAQ earnings? Well, to earn close to $5.71 per year from a bank, you’d have to deposit about $571 in a savings account today, so about 100x the desired earnings. At NASDAQ’s current share price of roughly $165, we are talking about a P/E multiple of around 29x. And we think a figure slightly above 30x will be appropriate.

That said, despite reporting growth in the last year, a financial exchange is still a risky proposition. While growth is likely, change in current market sentiment can harm the near-term outlook. What’s behind that?

NASDAQ’s business model is very sensitive to market volatility and trading volumes. Further, the recent jump in trading volumes was due to the significantly higher participation of retail investors. While the retail investors have enjoyed a good run since 2020, they don’t have much loss-taking capacity. Any sudden market course correction can result in significant losses for them, pushing them out of business, and negatively impacting the trading volumes. To sum things up, we believe that NASDAQ stock is slightly undervalued and offers limited upside.