Nasdaq Overview:
While you do not need to be a professional investor to be aware of the NASDAQ stock exchange, did you know that the parent company of the second-largest stock exchange in the world is more than just that? Not only does NASDAQ, Inc. boast 3 stock exchanges in the US and 7 in Europe; it has been making tech based moves into the more lucrative investment intelligence and market technology segments too! Does this make NASDAQ a potent money-making investment? Let’s break it down:
Nasdaq Thesis:
While Nasdaq is making moves into the tech sector, we need to also acknowledge their revenue growth over the past few years. Also while the percentage share of revenues earned from non-transactional activities (i.e. activities other than clearing financial market transactions) seems to be increasing steadily at the cost of transactional revenues, all the segments have been growing in absolute terms. In fact, while 2020 was a rollercoaster for most businesses, NASDAQ enjoyed a surge in all the 4 business segments that it caters to: Market Services, Corporate Platform Services, Investment Intelligence, and Market Technology. Let’s break the fundamentals down to understand the performance better:
- Rapidly increasing Revenues and Net Income: Arguably, no other indicators of performance can be as suggestive as company revenues and the net income earned over the years. In 2020, NASDAQ recorded $2.9 billion in revenue (minus transaction costs), a 15% increase as compared to the previous year ($2.5 billion in 2019). Moreover, the net profits improved by 20%, as the company inched closer to the $1 billion profit mark.
- Surging Earnings and Dividends per Share: The increased profitability can be clearly observed from the growing Diluted Earnings per Share (Diluted EPS) - $5.59 in 2020 as compared to $4.63 in 2019 and $2.73 in 2018. The Diluted EPS reflects the dollar profit earned for every current (and potentially issued) share. NASDAQ also paid $1.94 in dividends in 2020 and provides an average dividend yield of 1.11%. This is great - especially from a stock we’re analyzing from the growth perspective!
- Changing Business Model: With 70% of their revenues (now non-transactional in nature) predicted to rise to 80% by 2025, we are looking at higher margins, greater growth prospects and broader markets to penetrate. The company is leaving no stone unturned to ensure that its organic growth is sustained, and has made a number of tech acquisitions to facilitate the same. In 2020 alone, NASDAQ acquired OneReport, Solovis and Verafin, the last one costing $2.75 billion.
- Encouraging Technicals: An analysis of the trends can say a lot about the market’s perception of a stock. NASDAQ has been impressive here too! Its current price ($175) is already above its 50-day moving average ($170) and 200-day moving average ($151). The moving averages reflect the direction in which the stock prices are moving – with the current price already above the same, the stock is demonstrating a clear upward trend. Despite the optimistic returns earned by the stock, the price movements have been quite stable – in fact, the stock has been less volatile than the overall market, as indicated by its low beta (.85).
Our Take:
Some critics have remarked that the growth generated by NASDAQ might not be sustainable as the economy cools down, which would translate to low upside potential; we, however, beg to disagree. On the contrary, the company has proved in the last two years that its business is far from stagnant, as it comes face to face with other information services giants. Not only does this stock look like a promising growth opportunity, but it has also shown a lot of stability and resilience historically.
Price Target: $200 (~25% upside)
Current Price: $162
Rating: Overweight
Target Date: 10-12 Months
Ticker: NDAQ