A Closer Look At Nasdaq OMX’s Business And $29 Fair Value

by Trefis Team
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Trefis
NDAQ
Nasdaq OMX Group
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Nasdaq OMX’s (NASDAQ:NDAQ) earnings in 2011 were affected by a decline in investor confidence which led to tepid trade volumes in the first nine months of the calendar year. Diversification in operations helped the company mitigate the effect of an 18% decline in average daily share volume in the U.S. as revenues for the period were down just 9%.

Analyzing the operations, it can be observed that although Nasdaq earns nearly half of its $3.5 billion revenues from U.S. cash equity trading, the division’s contribution to EBITDA is far less at only 14%. Market data is the most important division, accounting for a fifth of total EBITDA while U.S. derivatives trading and U.S. listing services account for 15%. Access services and market technology are the other two important divisions with 13% and 11% of total EBITDA, respectively.

We believe that its diverse range of operations particularly in the non-transaction based domain holds Nasdaq in good stead. Our price estimate of $29 on Nasdaq OMX’s stock, which is at a premium of 20% to the current market price.

See our full analysis for Nasdaq OMX| NYSE Euronext|CME Group

Market Data

Nasdaq’s market data division provides quote and trade information to news channels and institutional clients like trading firms. At the end of 2011, the company acquired RapidData to deliver government and economic news to its clients via electronic feed. Following the start of the new service, U.S. market data revenues increased by 13% year-on-year in the first nine months of 2012. As the division does not incur transaction-based expenses like rebates, brokerage, clearance and exchange fees, it has much higher margins close to 50% compared to 25% for the trading division, which is why we believe it accounts for 24% of the company’s stock price.

We expect Nasdaq to maintain the momentum it has gained in the market data domain with a steady increase in U.S. market data revenues fueled by the company’s innovative initiatives and improving economic conditions which will drive the demand for such services.

Listing Services

Nasdaq has been in a constant tug of war with NYSE Euronext (NYSE:NYX) to attract listings in the U.S. The exchange has been historically successful in attracting technology companies with over 70% of such listed on Nasdaq. However, the Facebook (NASDAQ:FB) fiasco earlier this year tarnished the exchange’s reputation somewhat. Around 50% of all technology IPOs last quarter, including ServiceNow and Palo Alto, were on NYSE.

In addition, Indian technology company Infosys, part of the Nasdaq-100 index, has stated that it intends to move the listing of its U.S. depository shares to NYSE to make the stock accessible in Europe. [1]

The number of listings on Nasdaq has come down 3% from 2011, and we expect a short-term decline in the number. A long-term recovery is still on the cards as market conditions improve and Nasdaq regains its reputation. U.S. listings account for 15% of our price estimate for Nasdaq, primarily because of the high margins involved.

New Exchange In London, But How Big Is It?

Nasdaq is planning to open a new derivatives trading platform in London next year and management has indicated that the company will target 10% market share in the first year of operations. [2] The market is currently dominated by the duopoly of NYSE Euronext’s (NYSE:NYX) Liffe exchange and Deutsche Boerse.

In 2011, around 5 billion futures and options were traded and/or cleared in Europe. [3] With 257 trading days, this leads to average daily volume (ADV) of close to 20 million contracts. A 10% market share would lead to ADV of 2 million. However, this year, the industry has slowed down. NYSE, the market leader, reported a 20% decline in European derivatives products volume. We expect a gradual market recovery, but Nasdaq will have some difficulties in battling the incumbent exchanges. Thus we have a conservative forecast for Nasdaq’s European derivatives ADV reaching 1.54 million in 2013 and gradually increasing thereafter.

To attract market share, Nasdaq will likely have to offer a price incentive. NYSE’s average price per transaction is $0.70. We forecast Nasdaq to offer around $0.60 per contract, increasing gradually as the company establishes its operations in the region. This will also affect the division’s EBITDA margin.

Our current forecast shows that European revenues will more than double in the coming years with the opening of the new exchange. Even so, revenues of $200 million from the division are small compared to the company’s net revenues of $3 billion. Coupled with a lower margin, we do not expect the European division to have a great influence on Nasdaq’s stock. The division accounts for just 6% of our price estimate.

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Notes:
  1. NYSE Snags Infosys Listing From Nasdaq, The Wall Street Journal, 30th November, 2012 []
  2. Nasdaq’s U.K. Derivatives Platform Seeks 10% Market Share, Bloomberg Businessweek, October 11th, 2012 []
  3. Annual Volume Survey, FuturesIndustry.org []
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