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Nasdaq Stock Surges 43% YTD: What Should Be Investors' Approach Now?
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Shares of Nasdaq Inc. (NDAQ - Free Report) have rallied 43% year to date, zooming past the industry’s 17.8% increase, the Finance sector’s rise of 24.6% as well as the Zacks S&P 500 composite’s gain of 26.7% in the same time frame.
Nasdaq is a leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services. It is set for solid operational performance, banking on impressive organic growth, an increasing on-trading revenue base and strategic buyouts to capitalize on market opportunities. Nasdaq is investing in proprietary data, migrating markets and SaaS solutions to capitalize on the growth opportunities in the cryptocurrency markets.
NDAQ shares are trading well above the 50-day moving average, indicating a bullish trend.
Nasdaq Outperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
Optimistic Growth on NDAQ
The Zacks Consensus Estimate for 2024 implies a 1.1% year-over-year decrease, while the same for 2025 suggests an 11.9% increase. The expected long-term earnings growth rate is pegged at 9.2%, better than the industry’s growth rate of 8.4%.
NDAQ’s Favorable Return on Capital
Return on equity, reflecting the company’s efficiency in utilizing shareholders' funds, was 14.6% in the trailing 12 months, better than the industry average of 13.3%.
Image Source: Zacks Investment Research
Return on invested capital has stayed around 10% over the last few years. The company has raised its capital investment significantly, reflecting its efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 6.4%, higher than the industry average of 5%.
Image Source: Zacks Investment Research
NDAQ’s Growth Path
Nasdaq’s strategy to generate more revenues from high-growth Market Technology and Investment Intelligence segments, forward R&D spending toward higher-growth products, expand its Anti-Financial Crime clientele and make innovations poise it for growth.
The company estimates strong growth from its index and analytics businesses and moderate growth in its exchange data products across U.S. and Nordic equities. Nasdaq estimates Capital Access Platforms revenue growth of 5% to 8%, Financial Technology Revenue growth of 10% to 14% and total Solutions revenue growth of 8% to 11% over the medium term.
Its inorganic growth story is impressive as well. The Adenza Group buyout boosts its Marketplace Technology and Anti-Financial Crime solutions apart from strengthening offerings across a wider spectrum of regulatory technology, compliance and risk management solutions. Nasdaq estimates Solutions Business' medium-term organic revenue growth to be in the range of 8-11%.
Nasdaq noted that the anti-fin crime space has a total addressable market of $12.5 billion. Verafin consolidated Nasdaq's established reg tech leadership to create a global SaaS leader. Nasdaq aims to achieve 40-50% SaaS revenues as a percentage of total revenues by 2025.
Nasdaq has been incurring higher expenses leading to net margin contraction over time. It raised the low end of its non-GAAP operating expense guidance to the range of $2.15 billion to $2.18 billion for 2024, indicating a 5% increase from 2023. Nasdaq expects non-GAAP operating expense growth of 5% to 8% over the medium term.
Due to a change in corporate structure, NDAQ is estimated to incur $115 million to $145 million in pretax charges, of which about 40% will be non-cash charges. Nonetheless, Nasdaq estimates benefits in the form of combined annual run rate operating efficiencies and revenue synergies of at least $30 million by 2025.
Nasdaq’s debt has been increasing over the last few years, with the debt-to-equity ratio comparing unfavorably with the industry average. Lower times interest earned is also a concern.
NDAQ Shares Expensive
The stock is overvalued compared to its industry. It is currently trading at a price-to-earnings multiple of 26.24, higher than the industry average of 24.23.
Image Source: Zacks Investment Research
Shares of other players like Intercontinental Exchange, Inc. (ICE - Free Report) , MarketAxess Holdings Inc. (MKTX - Free Report) and CME Group (CME - Free Report) are also trading at a multiple higher than the industry.
Average Target Price for NDAQ Suggests a Downside
Based on short-term price targets offered by 18 analysts, the Zacks average price target is $72.78 per share. The average suggests a potential 0.25% downside from Friday’s closing price.
Image Source: Zacks Investment Research
How Should You Play the Stock Now?
Nasdaq has been successful in maximizing opportunities as a technology and analytics provider and growing core marketplace business. Its focus on market technology and information services businesses helps explore vast opportunities in line with its developmental strategies.
Nasdaq has steadily increased its dividend each year and will continue to do so to achieve a dividend payout ratio of 35-38% by 2027. Notably, its free cash flow conversion has remained more than 100% over the last many quarters, reflecting its solid earnings.
However, higher expenses and increasing debt with lower times interest earned, keep us cautious.
Image: Bigstock
Nasdaq Stock Surges 43% YTD: What Should Be Investors' Approach Now?
Shares of Nasdaq Inc. (NDAQ - Free Report) have rallied 43% year to date, zooming past the industry’s 17.8% increase, the Finance sector’s rise of 24.6% as well as the Zacks S&P 500 composite’s gain of 26.7% in the same time frame.
Nasdaq is a leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services. It is set for solid operational performance, banking on impressive organic growth, an increasing on-trading revenue base and strategic buyouts to capitalize on market opportunities. Nasdaq is investing in proprietary data, migrating markets and SaaS solutions to capitalize on the growth opportunities in the cryptocurrency markets.
NDAQ shares are trading well above the 50-day moving average, indicating a bullish trend.
Nasdaq Outperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
Optimistic Growth on NDAQ
The Zacks Consensus Estimate for 2024 implies a 1.1% year-over-year decrease, while the same for 2025 suggests an 11.9% increase. The expected long-term earnings growth rate is pegged at 9.2%, better than the industry’s growth rate of 8.4%.
NDAQ’s Favorable Return on Capital
Return on equity, reflecting the company’s efficiency in utilizing shareholders' funds, was 14.6% in the trailing 12 months, better than the industry average of 13.3%.
Image Source: Zacks Investment Research
Return on invested capital has stayed around 10% over the last few years. The company has raised its capital investment significantly, reflecting its efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 6.4%, higher than the industry average of 5%.
Image Source: Zacks Investment Research
NDAQ’s Growth Path
Nasdaq’s strategy to generate more revenues from high-growth Market Technology and Investment Intelligence segments, forward R&D spending toward higher-growth products, expand its Anti-Financial Crime clientele and make innovations poise it for growth.
The company estimates strong growth from its index and analytics businesses and moderate growth in its exchange data products across U.S. and Nordic equities. Nasdaq estimates Capital Access Platforms revenue growth of 5% to 8%, Financial Technology Revenue growth of 10% to 14% and total Solutions revenue growth of 8% to 11% over the medium term.
Its inorganic growth story is impressive as well. The Adenza Group buyout boosts its Marketplace Technology and Anti-Financial Crime solutions apart from strengthening offerings across a wider spectrum of regulatory technology, compliance and risk management solutions. Nasdaq estimates Solutions Business' medium-term organic revenue growth to be in the range of 8-11%.
Nasdaq noted that the anti-fin crime space has a total addressable market of $12.5 billion. Verafin consolidated Nasdaq's established reg tech leadership to create a global SaaS leader. Nasdaq aims to achieve 40-50% SaaS revenues as a percentage of total revenues by 2025.
Nasdaq has been incurring higher expenses leading to net margin contraction over time. It raised the low end of its non-GAAP operating expense guidance to the range of $2.15 billion to $2.18 billion for 2024, indicating a 5% increase from 2023. Nasdaq expects non-GAAP operating expense growth of 5% to 8% over the medium term.
Due to a change in corporate structure, NDAQ is estimated to incur $115 million to $145 million in pretax charges, of which about 40% will be non-cash charges. Nonetheless, Nasdaq estimates benefits in the form of combined annual run rate operating efficiencies and revenue synergies of at least $30 million by 2025.
Nasdaq’s debt has been increasing over the last few years, with the debt-to-equity ratio comparing unfavorably with the industry average. Lower times interest earned is also a concern.
NDAQ Shares Expensive
The stock is overvalued compared to its industry. It is currently trading at a price-to-earnings multiple of 26.24, higher than the industry average of 24.23.
Image Source: Zacks Investment Research
Shares of other players like Intercontinental Exchange, Inc. (ICE - Free Report) , MarketAxess Holdings Inc. (MKTX - Free Report) and CME Group (CME - Free Report) are also trading at a multiple higher than the industry.
Average Target Price for NDAQ Suggests a Downside
Based on short-term price targets offered by 18 analysts, the Zacks average price target is $72.78 per share. The average suggests a potential 0.25% downside from Friday’s closing price.
Image Source: Zacks Investment Research
How Should You Play the Stock Now?
Nasdaq has been successful in maximizing opportunities as a technology and analytics provider and growing core marketplace business. Its focus on market technology and information services businesses helps explore vast opportunities in line with its developmental strategies.
Nasdaq has steadily increased its dividend each year and will continue to do so to achieve a dividend payout ratio of 35-38% by 2027. Notably, its free cash flow conversion has remained more than 100% over the last many quarters, reflecting its solid earnings.
However, higher expenses and increasing debt with lower times interest earned, keep us cautious.
Thus, given a premium valuation, it is better to adopt a wait-and-see approach for this Zacks Rank #3 (Hold) stock in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.