Be The Bookie When You Invest In This Stock

Some snarky traders will call the stock market the world’s greatest casino. 

In most casino games, the house has an edge and routinely wins. 

Is that true about U.S. stock exchanges too?

The Nasdaq exchange is where Apple, Microsoft, Alphabet, Amazon.com, Tesla, and Meta Platforms, are listed. 

And the Nasdaq itself is a publicly-traded company.

But are exchanges like casinos?

And more importantly, is Nasdaq (NDAQ) a good stock to buy?

While you may not think of exchanges as popular investment vehicles, they garner quite a bit of interest, especially since stock and option trading volume skyrocketed during the pandemic.

The Nasdaq receives nearly double the search volume from financial pros as its nearest competitor, the CME Group (CME).

While the stock is down almost 30% from its highs, it generates an incredible amount of cash.

But don’t be fooled, that’s diluted amongst the 168 million shares outstanding.

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Nasdaq, Inc. (NDAQ) Business

NDAQ became the world’s first electronic stock market back in 1971. Today, there are over 4,000 listed companies on its exchange. Apple, Amazon, Microsoft, and Alphabet all trade on the Nasdaq exchange. 

The firm’s market technology segment, which includes anti-financial crime technology, and market infrastructure did $124 million in revenues during Q1 2022. 

60% of the market technology revenues came from the SaaS solutions it provides to brokers and other market participants. 

Another big source of revenue comes from the investment intelligence segment, which includes market data, indexes, and analytics. 

NDAQ has a corporate platforms segment, which includes listing services, IR, and ESG services. 

Its market services segment includes equity derivatives trading and clearing, cash equity trading, fixed income and commodities trading and clearing, and trade management services. 

Market services provided $315 million in revenue for NDAQ in Q1 2022.  Which is the company’s biggest earnings driver. 

Financials

NDAQ saw revenues skyrocket in 2020 as trading volume increased alongside the pandemic.

Markets saw more retail traders opening brokerage accounts, getting involved with stocks and options more than ever before.

Yet, margins compressed as the company dealt with fixed and other costs it couldn’t walk away from during shutdowns.

Nonetheless, those rebound to give the company its healthies gross margins since 2017.

NDAQ has experienced revenue growth of -2.58% YoY, which is much worse than the sector median of 12.76%.  This came about as trading volume subsided after the initial frenzy where retail jumped in as they worked from or were stuck at home.

In 2021 NDAQ had a current ratio of 0.94x, which means its assets are not enough to cover its short-term liabilities.  

Furthermore, NDAQ in 2021 had a quick ratio of 0.15x,  which means its highly liquid assets were not enough to cover its short-term liabilities. 

However, the company has a free cash flow of $1.1 billion or $6.77 per share. Yet, that doesn’t mean much when the stock trades north of $150.

The capital structure for NDAQ is as follows: total debt of $6.43 billion and cash upwards of $556 million, and a market cap of approximately $25.63 billion. 

That’s not too bad considering it only costs them $118 million in interest expenses each year.

Valuation

We don’t look too favorably on NDAQ’s P/E ratio.

The trailing non-GAAP sits at 20.53x with the forward only improving to 19.85x. That’s nearly double the sector median.

And the price-to-sales ratio of 4.48x is just as bad, especially for a company that isn’t known for high growth.

NDAQ has a price-to-cash-flow ratio of 19.81x, which is not as good as the sector median of 7.83x and shows how despite its nice cash flow, it gets diluted rather quickly.

The firm pays an annual dividend of $2.40 per share which isn’t bad still below the sector average.

Our Opinion – 5/10

While the NDAQ is a stalwart with a consistent business model, its valuation leaves a lot to be desired.

It’s hard to see retail traders continuing to participate at such high levels during market pullbacks. Plus, many are being pushed to return to work in the office.

Overall, the NDAQ is a great company. Just not at these prices.

While it’s far away, $100 per share would be a nice spot to start dipping into a position.