Nasdaq Inc. (NDAQ): A Year of Remarkable Growth and Strategic Expansion

Shares of Nasdaq Inc. (NDAQ) have experienced a remarkable rally, surging 43% year to date. This impressive performance has outpaced the broader finance sector, which has seen a rise of 24.6%, and the Zacks S&P 500 composite, which gained 26.7%. In comparison, the industry average increase stands at 17.8%. This growth trajectory highlights Nasdaq’s robust operational performance and strategic positioning in the financial markets.

Diverse Offerings and Strategic Focus

Nasdaq is not just a stock exchange; it is a leading provider of trading, clearing, marketplace technology, regulatory services, securities listing, and information for both public and private companies. The company is poised for solid operational performance, driven by impressive organic growth and an expanding on-trading revenue base. Nasdaq’s strategic acquisitions are also aimed at capitalizing on emerging market opportunities, particularly in the rapidly evolving cryptocurrency sector.

The company is making significant investments in proprietary data, migrating markets, and Software as a Service (SaaS) solutions. These initiatives are designed to leverage growth opportunities in the cryptocurrency markets, which are becoming increasingly mainstream.

Technical Indicators and Earnings Outlook

Currently, NDAQ shares are trading well above their 50-day moving average, signaling a bullish trend among investors. However, the Zacks Consensus Estimate for 2024 suggests a slight year-over-year decrease of 1.1%, while projections for 2025 indicate a more optimistic 11.9% increase. Nasdaq’s expected long-term earnings growth rate is pegged at 9.2%, surpassing the industry average of 8.4%.

The company’s return on equity (ROE) stands at 14.6% over the trailing 12 months, outperforming the industry average of 13.3%. This metric reflects Nasdaq’s efficiency in utilizing shareholders’ funds to generate profits. Additionally, the return on invested capital (ROIC) has remained around 10% in recent years, with a trailing 12-month ROIC of 6.4%, again higher than the industry average of 5%.

Revenue Growth Strategies

Nasdaq’s strategy to enhance revenues focuses on high-growth segments such as Market Technology and Investment Intelligence. The company is also increasing its research and development spending to foster innovation in higher-growth products. With a keen eye on expanding its Anti-Financial Crime clientele, Nasdaq is well-positioned for future growth.

The company anticipates strong growth from its index and analytics businesses, alongside moderate growth in its exchange data products across U.S. and Nordic equities. Nasdaq projects Capital Access Platforms revenue growth between 5% to 8%, Financial Technology revenue growth of 10% to 14%, and total Solutions revenue growth of 8% to 11% over the medium term.

Inorganic Growth and Market Positioning

Nasdaq’s inorganic growth strategy is equally impressive. The acquisition of the Adenza Group is expected to enhance its Marketplace Technology and Anti-Financial Crime solutions, broadening its offerings in regulatory technology, compliance, and risk management. The company estimates that its Solutions Business will achieve medium-term organic revenue growth in the range of 8-11%.

The anti-financial crime sector presents a significant opportunity, with a total addressable market of $12.5 billion. The acquisition of Verafin has further solidified Nasdaq’s leadership in regulatory technology, positioning it as a global SaaS leader. The company aims to achieve 40-50% of its revenues from SaaS by 2025.

Expense Management and Financial Health

Despite its growth, Nasdaq has faced challenges related to rising expenses, which have led to net margin contraction over time. The company has raised its non-GAAP operating expense guidance for 2024 to a range of $2.15 billion to $2.18 billion, reflecting a 5% increase from 2023. Nasdaq expects non-GAAP operating expense growth of 5% to 8% over the medium term.

Additionally, a change in corporate structure is expected to result in pretax charges between $115 million and $145 million, with approximately 40% of these being non-cash charges. However, Nasdaq anticipates benefits from combined annual run rate operating efficiencies and revenue synergies of at least $30 million by 2025.

Valuation and Market Comparisons

While Nasdaq has demonstrated strong growth, its stock is currently considered overvalued compared to the industry average. The shares are trading at a price-to-earnings multiple of 26.24, higher than the industry average of 24.23. Other players in the sector, such as Intercontinental Exchange, Inc. (ICE), MarketAxess Holdings Inc. (MKTX), and CME Group (CME), are also trading at multiples above the industry average.

According to short-term price targets from 18 analysts, the Zacks average price target for Nasdaq is $72.78 per share, suggesting a potential downside of 0.25% from the recent closing price.

Commitment to Shareholder Returns

Nasdaq has consistently increased its dividend each year, with a goal to achieve a dividend payout ratio of 35-38% by 2027. The company’s free cash flow conversion has remained above 100% over the past several quarters, indicating strong earnings and a commitment to returning value to shareholders.

While Nasdaq’s growth prospects are promising, the challenges of rising expenses and increasing debt, coupled with a lower times interest earned ratio, warrant a cautious approach. Given its premium valuation, investors may consider adopting a wait-and-see strategy for this Zacks Rank #3 (Hold) stock in the near term.