NASDAQ OMX (NASDAQ:NDAQ) is one of the most well-diversified exchange operators in the world, and that is likely a primary reason that its stock has remained relatively insulated from the weakness in its oldest and most widely-recognized businesses. Its stock increased almost 60% in 2013, in line with the growth in other peer firms such as CME (NSDAQ:CME), even though its U.S. cash trading segment continues to lose market share and faced some embarrassing technical glitches in the last few years. The stock’s rise can be partly attributed to the rally in the overall U.S. market, and partly to the optimism around NASDAQ’s non-transaction based businesses such as market data, technology and corporate solutions.
In this article we take a look at some of the most important events and trends that impacted NASDAQ in 2013. Our price estimate for the company’s stock is around $31, which is nearly 20% below the current market price.
Traditional Businesses Continue To Stumble
NASDAQ is traditionally known as a cash trading exchange and an IPO destination for technology companies. However, both of these businesses have not been doing particularly well, with the company’s market share in U.S. equity cash trading declining from nearly 30% in 2008 to just around 16% as alternative trading venues continue to gain ground.  The 3-hour long technology-related market shutdown that hit NASDAQ’s stock market on August 22 has also dented its reputation. The event raised serious doubts about NASDAQ’s technological capabilities, especially since it happened within 18 months of Facebook’s IPO fiasco, and might have long term implications for its U.S. listings business. With most large technology firms listed on its platform, NASDAQ currently dominates the tech-sector listings market. However, the recent technology glitches on its platforms seem to be slowly tilting the scales in favor of its arch-rival NYSE. Within the last year, a significant number of technology companies, including Twitter, have chosen NYSE over NASDAQ as their IPO destination. Should the trend continue, NASDAQ risks losing not only its edge in the tech-IPO race but also existing clients. In 2013, Oracle (NYSE:ORCL) became the first large technology firm to shift from NASDAQ to NYSE. 
But New Acquisitions Drive Growth
Despite the problems in its traditional businesses, NASDAQ does have some bright future prospects. The company has a well-diversified business portfolio, which has been strengthened even more by two new acquisitions in 2013. The first acquisition, Thomson Reuters’ corporate solutions business, strengthens NASDAQ’s market data and corporate solutions divisions by broadening its client relationships and product offerings, and opens new cross selling opportunities. NASDAQ’s management expects the acquisition to generate impressive returns in the future, and to start contributing to the bottom line within the next few months.
NASDAQ’s second acquisition, an electronic bond platform called eSpeed, strengthens its transaction based business, and provides a growth opportunity in a rising rate environment. The platform is one of the leading venues for liquid U.S. treasuries and is likely to see a surge in volumes as the Fed is rolling back its quantitative easing (QE) program. U.S. treasury volumes have been subdued over the past few years to due to the Federal Reserve’s QE program, in which the central bank was buying almost $45 billion of treasuries each month.Notes: