Which Exchange Stock Looks Expensive: NASDAQ or ICE?

by Trefis Team
Nasdaq OMX Group
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NASDAQ (NASDAQ: NDAQ) and Intercontinental Exchange (NYSE: ICE) have both outperformed the broader S&P 500, with their stock declining by roughly 6% since early February after the WHO declared the Coronavirus a global health emergency. The lockdown in various parts of the world has, and the ensuing economic uncertainty has led to significant volatility in the securities market. However, higher trading volumes have translated into more revenues for exchanges in the form of clearing and transaction fees – as evidenced in the first quarter of 2020. Notably, we believe that both the stocks have limited upside potential, but Nasdaq has a small advantage over its peer.

In its recently released Q1 2020 results, NASDAQ reported an 11% growth in revenues y-o-y. Further, we believe NDAQ’s fiscal Q2 results in July will confirm higher trading volumes, and the company could come with 2020 revenue expectations roughly 5% more than 2019. This could potentially result in NASDAQ’s P/E multiple increasing to above 23.1, with the stock jumping to around $115 again, as seen in February this year. Intercontinental Exchange will likely improve too, but less so. While the revenue expectations for 2020 are around 16% more than the figure in 2019 at the time of its fiscal Q2 2020 earnings in July, a P/E multiple around 26.9x implies that the market has already factored in the revenue jump and the company’s stock could remain around current levels over the coming months.

Our conclusion is based on our detailed dashboard analysis, “Is NASDAQ Inc. Expensive Or Cheap vs. Intercontinental Exchange?”, wherein we compare trends in key metrics for the two technology companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.


NASDAQ And Intercontinental Exchange Have Both Seen Their Stock Follow A Similar Trajectory Since Early-February

Both NASDAQ and Intercontinental Exchange are U.S.-based financial exchanges with a nearly-identical business model, which includes market services, corporate services, and data & technology service units. Due to their similar revenue segments, they face similar risks from the economic slowdown. More information about the key components of NASDAQ’s revenues is available in a separate interactive dashboard.

NASDAQ’s P/E based on 2019 earnings has improved from 22.7x in 2019 to 23.1x currently, while Intercontinental Exchange’s multiple has increased from 26.8x to about 26.9x. However, NASDAQ’s multiple (based on 2019 EPS) appears to have some more upside potential, keeping in mind that the company’s revenues/margins face the same risk compared to ICE. We believe that ICE’s P/E multiple remains appropriate. In contrast, NDAQ’s P/E is still about 20% lower than the 28.7x multiple it traded at in 2018 and 15% lower than ICE’s current multiple – implying that investors are over-cautious about the stock.

Overall, it’s likely that NASDAQ stock will outperform Intercontinental Exchange. Likely that the ground reality for NASDAQ will be confirmed during its Q2 results when strong results will be coupled with positive guidance for 2020.

Historical Performance

  • Trends in Stock Price over the years: Over 2009-2019, NASDAQ stock has grown at 1.6x the rate of Intercontinental Exchange
    • Nasdaq Inc. stock went from $17.14 at the end of 2009 to $106.59 at the end of 2019, representing a change of 521.9%.
    • During the same time period, the Intercontinental Exchange went from $21.36 to $92.22, representing a change of 331.7%.
  • Trends in P/E Multiple over the years: Based on trailing 2019 P/E ratios, NASDAQ stock looks attractive compared to Intercontinental Exchange and is comparable to prior years.
    • Intercontinental Exchange’s P/E is more than its peer due to its higher annualized growth of return over 2014-19.
    • Historical Revenue Growth: NDAQ 2014-19 annualized revenue growth of 4% is 0.47x that of the 2014-19 ICE’s annualized Revenue growth rate of 8.5%.
    • Historical EPS Growth: ICE’s 2014-19 annualized EPS growth of 14.9% is 1.07x that of the 2014-19 NDAQ’s annualized EPS growth rate of 13.9%.


But Will NASDAQ Stock Remain Under Pressure In The Near-Term?

The expected timeline for recovery in global economic conditions, and in NASDAQ’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to improve in later quarters of 2020. As the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the scenarios that are easily imagined during difficult times. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of NASDAQ multinational peers. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe NASDAQ’s stock price at levels of $112 and below (the Trefis price estimate) provide a buying opportunity for investors willing to be patient. Further, there may be an even bigger opportunity when you compare JPMorgan to Wells Fargo.


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