Own the Stock Exchange…Literally

Have you ever pondered what drives the financial markets beyond the visible layer of stocks and trading?

 An intriguing surge in search activity by financial pros for the Nasdaq (NDAQ) recently caught our attention, diverging from typical investor behavior. 

This spike isn’t about market movements but centers on the company powering these exchanges. 

What could be driving this sudden interest in an entity that’s more backbone than front-runner in the financial world?

Nasdaq’s Business

Nasdaq is more than just a stock exchange – it’s a technology leader enabling clients to navigate the business world confidently. 

The company offers the capital markets a unique blend of data, analytics, and tech services:

• Market Platforms (50% of revenues): A hub for trading services across various asset classes from equity derivatives. This is traditionally what you think of when you hear about the Nasdaq.
• Capital Access Platforms (35% of revenues): Delivers market data, indexes, and investment insights. This includes listing platforms where companies can go public or even do direct listings and SPACs.
• Anti-Financial Crime (15% of revenues): Specializes in solutions to prevent financial crimes. This includes Nasdaq Trade Surveillance SaaS for brokers and market participants to help them comply with rules and regulations. 

Nasdaq sees its growth less in traditional indexes and thematics and more in technology and insights.

Source: Nasdaq Q3 Earnings Presentation

So, what caused the surge in search volume?

Our data suggests it is tied to the latest headline that the Nasdaq, leaning into the 0-DTE same-day options growth, planned to add more intraweek options contracts to popular ETFs like oil’s USO, gold’s GLD, treasuries TLT, natural gas’ UNG, and silver’s SLV.

Financials

Source: Stock Analysis

Although Nasdaq reports topline revenues, it focuses on net revenues, or the gross profit numbers, which are revenues less transaction-based expenses.

Using this measure, we see a slow but steady increase every year for the last decade.

Profit margins remained steady, with one outlier tax bill in Q4 2018 causing profit margins to drop substantially. This came from them finalizing a $289 million non-cash charge related to the Tax Cuts and Jobs Act.

Nasdaq pumps out more than $1 billion a year in free cash flow to distribute to investors, which it does through a 1.63% dividend and repurchase of stock that’s usually 1x-2x the size of the dividend.

Valuation

Source: Seeking Alpha

Nasdaq trades at reasonable valuations – 19.6x non-GAAP earnings and 17.6x cash compared to the Intercontinental Exchange (ICE) at 20.4x and 17.7x, respectively. The Chicago Mercantile Exchange (CME) is a bit pricier, but not by much.

However, the data and credit ratings agencies S&P Global (SPGI) and MSCI (MSCI) trade at much higher multiples. 

Growth

Source: Seeking Alpha

The Nasdaq’s YoY revenue growth decline doesn’t accurately depict its performance. But, we feel the average growth over 3-5 years can give us an idea of the trend.

Interestingly, the Nasdaq and CME didn’t grow nearly as quickly as the others in this list.

However, Nasdaq trounces most in free-cash-flow and EBIT growth over the last three years.

Profitability

Source: Seeking Alpha

It’s interesting to see compare margins across these companies.

Nasdaq appears far less profitable than its peers in nearly every regard. For instance, its net income margin is the worst of the group.

Even when we recalculate ICE’s free-cash-flow margin to 33.1%, Nasdaq is still the lowest of the group.

However, Nasdaq boasts the best return on equity and the second-best return on assets and capital.

Our Opinion 6/10

While the Nasdaq appears expensive, its valuations are largely in line with its history.

However, we don’t see much room for shares to move higher, which historically aren’t volatile.

The business is great. But the returns for investors just aren’t there.

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