Why NASDAQ Is Worth $97
NASDAQ (NASDAQ: NDAQ) has had a robust first half of 2018, comfortably beating consensus estimates in both quarters. The company’s focus on expanding its non-trading lines of business has helped it perform strongly despite a slightly less volatile period leading to low trading volume. The growth in non-trading business segments – including Corporate Services, Market Technology and Information Services – is largely due 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 largely to equities. We have a $97 price estimate for Nasdaq, which is higher than the current market price. The various driver assumptions can be modified by accessing our interactive dashboard on Our Outlook For Nasdaq In Fiscal 2019, to gauge their impact on the earnings and price per share metrics.
We have arrived at a $97 price estimate for Nasdaq based on revenue projections of $2.55 billion for FY 2019, net income of $858 million, a P/E multiple of 18.4, and a share count of 163 million. The market price stood at $86 as of October 2, 2018, implying our price estimate is higher by 13%.
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 should likely drive recovery in trading volumes. Nasdaq’s acquisition of ISE led to a massive jump in its U.S. equity options market share, and we expect the volumes to further increase. Further, its acquisition of eVestment and Cinnober should help it boost its Market Technology division and provide for decent medium term growth opportunities. However, losses in cash equity market share have been an issue for the company for a while.
We expect $759 million in revenue (under +1 % year-over-year annually) from Equity Options, $1.4 billion revenue (+2% y-o-y annually) from Cash Equities and $98 million (+1% y-o-y annually) from Fixed Income in 2019. Trade management revenue increased primarily due to an increase in customer demand for network connectivity, co-location, and test facilities as well as ISE’s acquisition. As a result, we expect the overall Market Service revenue to grow to about $922 million (+2% y-o-y annually).
NASDAQ’s non-trading business lines generate around 65% of the company’s overall revenues. These businesses have grown by over 8% annually of late. The growth in the Information Services segment was largely due to 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. In addition, we believe the eVestment acquisition should bolster its Market Technology division and attract more institutional investors. Additionally, its acquisition of Cinnober should further strengthen its foothold in the technology and analytics space, and better equip Nasdaq in the fast-growing crypto space.
Improved need for data and technology-related products and services should likely sustain the growth momentum for these segments. We expect around $1.64 billion (+3% y-o-y) in revenue from the non-trading segment.
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