Is The Market Pricing NASDAQ Fairly?

by Trefis Team
Nasdaq OMX Group
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NASDAQ (NASDAQ:NDAQ) has performed strongly over the past couple of years, with over 8% annual growth in revenue and a 65% jump in the stock price between 2015-2017. The company’s focus on growing its non-trading lines of business has helped it perform strongly despite a somewhat less volatile period leading to low trading volume. The rise in non-trading business segments – including Corporate Services, Market Technology and Information Services – is attributable to both organic growth as well as acquisitions. The Market Services segment saw revenue growth, primarily due to acquisitions, and otherwise would have seen a decline driven by unfavorable trading conditions. We expect the non-trading segment to sustain growth momentum owing to increased demand for technological and data products. However, the Market Services segment will likely provide headwinds to the top-line growth due to increased competition from competing brokerages and Nasdaq’s product offerings remaining restricted to equities.  Our price estimate of $118 suggests that the company is significantly undervalued.

We have also created an interactive dashboard which shows our forecasts and estimates for the company; you can modify the key value drivers to see how they impact the company’s revenues, bottom line, and valuation.

Steps To Arrive At Our Price Estimate

Nasdaq generates revenue from four segments: Market Services, Information Services, Market Technology , and Corporate Services. Market Services revenues are comprised of Equity Options, Cash Equity, Fixed Income, and Trade Management. Improvement in U.S. macro conditions and European geopolitical conditions is likely to drive improvement in trading volumes. Nasdaq’s acquisition of ISE led to a massive jump in U.S. equity options market share, and we expect the volumes to further increase. However, losses in cash equity market share have been an issue for the company for a while.

We expect $757 million in revenue (+1 % year-over-year) from Equity Options, $1.3 billion revenue (+1% y-o-y) from Cash Equities and $97 million (+1% y-o-y) from Fixed Income in 2018. Trade management revenue increased primarily due to an increase in customer demand for network connectivity, co-location, and test facilities and ISE’s acquisition. The overall Market Service revenue are likely to remain around 2017 level at $888 million.

NASDAQ’s non-trading business lines generate over 65% of the company’s overall revenues. These businesses grew by over 8% annually. The growth in the Information Services segment was supported by the increased adoption of its in-house products such as IR Insight and Influencer, and the company’s continued efforts in innovating customer-centric financial products. The Market Technology segment grew organically due to increased uptake of software licensing and support, surveillance, and advisory.

Increased demand for data and technology-related products and services is likely to sustain the growth momentum for these segments. We expect around $1.59 billion (+3% y-o-y) in revenue from the non-trading segment.

We forecast revenue of $2.5 billion and operating income of $1.04 billion. With other expenses and income tax provisions of $112 million and $238 million, respectively, we forecast net income of over $690 million.

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