Nasdaq Inc: A Diversified Financial Powerhouse
Nasdaq Inc: A Diversified Financial Powerhouse
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Contents:
1. Key Facts
2. Business Overview
3. Management
4. Industry
5. Financial Analysis
6. Competitive Advantages, Opportunities and Risks
7. Valuation
8. Conclusion
1. Key Facts
Description: Nasdaq Inc (“Nasdaq”, “Company”) with ticker $NDAQ is a leading stock exchange operator in the US and in the Nordics offering trading services, marketplace technology, listing and index services as well as solutions for the financial services sector.
Key Financials: Over the period FY13 to trailing twelve months (“TTM”) Q2 FY23, the Company depicted a net revenue (Revenues less transaction-based expenses) Compound Annual Growth Rate (“CAGR”) of 7.3% and operating income CAGR of 8.7%, reaching a TTM revenue of c. $3.64B and operating income of $1.73B (margin of 47.5%). Nasdaq has cash and short-term investments of $5.6B compared to total debt and long-term lease liabilities of $10.2B.
Price & Market Cap (as of 25th July 2023): Its market cap is $25B with a 52-week low of $48.7 and a 52-week high of $69.2, whereas it currently trades at $51.1.
Valuation: Nasdaq trades at a TTM EV/EBITDA of 15 (3 Year average of 17.2) and a TTM EV/Sales of 4.9 (3 Year average of 5.3).
2. Business Overview
Nasdaq of today
Nasdaq Inc operates the Nasdaq stock exchange in US, known for being the most active stock exchange in terms of share volume traded and the second largest in market capitalization of shares traded, closely trailing the New York Stock Exchange (NYSE).
Largest stock exchange operators worldwide as of May 2023, by market capitalization of listed companies (in trillion U.S. dollars)
Source: Statista
According to Statista, as of June 2023, the combined market capitalization of listed companies on NYSE and NASDAQ reached an impressive $46 trillion, with approximately $25 trillion listed on NYSE and $21 trillion on Nasdaq. While NYSE held the upper hand in market capitalization, Nasdaq has steadily gained popularity over the years narrowing the gap with its larger competitor ($23 trillion in NYSE and $11 trillion in NASDAQ back in January 2018). This success can be attributed to Nasdaq's appeal to tech companies, which were drawn to the exchange early on, as well as its softer listing requirements that attracted young companies seeking to raise capital in the public markets.
Nasdaq Inc. expanded beyond its US roots and transformed into a global exchange operator in 2008 when it acquired OMX AB, subsequently known as Nasdaq Nordic for $3.7 billion. Nasdaq Nordics, comprises of exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Reykjavik (Iceland), as well as Nasdaq Baltics with exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania). This international presence has further strengthened Nasdaq's position in the global financial landscape.
Is Nasdaq, Inc. solely a stock exchange operator?
Far from it. Over the years, Nasdaq has strategically transformed itself into a global technology company with diversified revenue streams, offering services to the capital markets and the financial services sector. Beyond its role as a stock exchange operator, Nasdaq offers an array of services, including listing services, index, marketplace technology and trading services as well as data, analytics and software solutions for corporates and investors.
In 2017, Nasdaq made a pivotal move, redirecting resources towards its most promising growth opportunities, which encompassed various areas, such as anti-financial crime, marketplace technology solutions, workflow solutions for investment management, and corporate solutions, including Environmental, Social, and Governance (ESG) initiatives and investor relations.
Several strategic acquisitions confirm Nasdaq's commitment to diversifying its revenue streams:
Adenza for $10.5B in FY23 (more on this later) - risk management and regulatory software technology provider to financial institutions
Metrio in FY22 – Software Platform for ESG data collection, analytics and reporting
Verafin for $2.75B in FY21 - SaaS technology provider of anti-financial crime management solutions that provides a cloud-based platform to help detect, investigate, and report money laundering and fraud
Solovis in FY20 – provider of portfolio management solutions including investment data, analytics and reporting tools for the public and private markets
Cinnober for $219 million in FY19 – market infrastructure technology for exchanges, brokers and clearinghouses
eVestment for $705 million in FY18 - content and analytics provider used by asset managers, investment consultants and asset owners to facilitate investment decisions.
Focus on recurring revenues
Nasdaq’s Solutions Business revenues, which excludes transaction-based revenues (included in trading services of the Market Platforms segment and other revenues) have shown significant growth, rising to 73% of the total revenue in the most recent quarter, compared to 63% in FY18. Over time, the Solutions Business has exhibited robust organic growth, with an average growth rate of 9% between 2018 and 2022 compared to a growth rate of 4% in FY17. Encouragingly, management foresees continued growth in Solutions Business, projecting an annual growth rate of 7-10% over the next 3-5 years.
Source: Investor Day 2022
To gauge its Solutions Business performance, Nasdaq closely monitors its Annual Recurring Revenue (ARR) and Software as a Service (SaaS) revenue. Over the period Q4’17 to Q4’22, ARR increased from $1,216 million to $2,007 million, and as of Q2’23, it reached $2,073 million, representing a 6% year-on-year increase.
Source: Q2’23 Earnings Presentation
Nasdaq's strategic acquisitions, including Verafin, Solovis, and eVestment, have significantly contributed to the rise in software revenues. Management's target is to achieve 50% SaaS annualized revenue as a percentage of its ARR by 2027, a substantial increase from the current 36% (compared to 21% in Q4’16). In Q4’16, Nasdaq's annualized SaaS revenue amounted to $244 million, while as of Q2’23, it has soared to $755 million, reflecting a CAGR of 19% over the period.
Assuming ARR grows by 8.5% (mid of 7%-10% expected growth in Solutions business), SaaS revenue should reach ~$1.44B by Q2’27 to account for 50%. This implies a CAGR of 17.5% which is in line with historic rates.
Amidst this expansion and diversification of revenue streams through acquisitions and organic growth, Nasdaq has managed to successfully increase its EBITDA margin from 52% in FY18 to 55% in FY22. This indicates that the growth achieved through strategic acquisitions has been accretive to profitability, demonstrating Nasdaq's ability to grow profitably.
Business Segments
Nasdaq operates through three business segments: Market Platforms, Capital Access Platforms and Anti-Financial Crime.
Source: Stratosphere.io (use coupon code STOCKOPINE for a 25% discount), StockOpine Analysis
Capital Access Platforms has been gaining market share in the mix driven by the Index business while Anti-Financial Crime is the fastest growing segment depicting revenue CAGR of 31% over the period FY18 to FY22. Another fact worth noting is the increasing profitability in all segments as shown below.
Source: Investor Presentation April 2023
The segments are broken down into the following sub-segments:
Market Platforms – Includes revenue from Trading and Marketplace Technology
Capital Access Platforms – Includes revenue from Data & Listing, Index and Workflow & Insights
Anti-Financial Crime
Source: StockOpine Analysis
Market Platforms
Trading services and marketplace technology: Trading services generate transaction-based revenues by operating the exchanges, while marketplace technology provides market infrastructure solutions to other exchange operators, brokers, and market makers.
Source: Stratosphere.io (use coupon code STOCKOPINE for a 25% discount), StockOpine Analysis
With the objective of modernizing markets, this segment has consistently driven revenue and operating margin higher with a 6.4% average organic revenue growth over the last five years. Looking ahead, management targets a revenue growth of 3-5% over the next 3-5 years and aims to double its SaaS revenue from marketplace technology by 2025. As of now, the segment's ARR stands at $516 million, accounting for 25% of the total ARR, while its annualized SaaS revenue amounts to $38 million, representing 5% of the total annualized SaaS revenue.
a. Trading Services
Nasdaq provides market participants with seamless access, processing, display, and integration of orders and quotes. Its platforms facilitate the routing and execution of buy and sell orders, as well as transaction reporting, contributing to fee-based revenues.
Nasdaq earns fees for trades executed on its exchanges with its revenue driven by the volume of equity shares and derivative contracts traded. Net revenues from trading services amounted to $1,019 million in FY22 (64% of the segment’s revenue and 28% of total), reflecting a slight 2% decline compared to the previous year due to lower volumes of cash equity securities affected by the slowdown in capital markets.
Management identifies opportunities in the growing adoption of option contracts, where Nasdaq ranks as the second exchange player behind CBOE, accounting for 17% of the average daily exchange-traded options during March 2023, while CBOE holds almost 62%.
Source: Statista
b. Marketplace technology
Marketplace technology encompasses highly recurring revenues, mainly derived from trade management services and market technology services with revenues of $562 million (36% of the segment's revenue and 16% of total) in FY22.
Trade management services offer market participants alternative access and connectivity to Nasdaq's exchanges for a fee. Additionally, Nasdaq provides space and power to house market participants' servers and equipment within its data centers.
Market technology primarily generates revenue through SaaS and license fees for Nasdaq's developed technology solutions. The segment's total addressable market (TAM) for market technology is estimated at $12.7 billion, with a serviceable available market (SAM) of $3.3 billion. Management identifies future opportunities for its segment in cloud infrastructure for exchanges and potential growth in digital assets and carbon markets.
Until recently, Nasdaq was planning to launch a proprietary custody solution in US in the Digital asset space, pending regulatory approval, however, the Company announced in Q2’23 earnings call that the launch has been halted, citing regulatory environment in the U.S.
Nonetheless, the Company remains committed to digital asset solutions and index solutions for ETF listings in the space. Furthermore, its investment in Puro.earth, a crediting platform for engineered carbon removal, positions Nasdaq to capitalize on the increasing demand for carbon removal by corporations, estimated to be a $2 billion serviceable available market by 2030 (currently negligible).
Capital Access Platforms
The Capital Access Platforms segment is the most intriguing aspect of Nasdaq's business, offering a wide range of solutions that span from IPO and listing services to index, data, and software solutions tailored for the investment community. Additionally, the segment provides corporate services focused on ESG, governance, and investor relations.
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Within the Capital Access Platforms segment, three sub-segments contribute to revenue: Data and Listing services, Index, and Workflow & Insights, which accounted for 43%, 29%, and 28% of the segment's total revenues as of Q2’23, maintaining a similar mix throughout FY22. Over the last five years, the segment has displayed revenue CAGR of 13.1%, with the index business emerging as the primary driver. This robust performance has elevated the operating margin above the 50% range, rebounding from the impact of acquisitions in FY18.
The CAGR breakdown from FY18 to the last twelve months (LTM Q2’23) reveals the following: Data and Listing services achieved a CAGR of 7.4%, Index recorded 20.7% CAGR, and Workflow & Insights achieved 9.9% CAGR. This strong growth is complemented by a broad client base, with over 15,000 corporate and investor clients. The segment's ARR stands at $1,218 million, constituting 59% of the total ARR, while its annualized SaaS revenue amounts to $394 million, reflecting 52% of the total annualized SaaS revenue, emphasizing the highly recurring nature of the segment.
Looking ahead, management aims to achieve 5-8% organic revenue growth over the next 3-5 years.
a. Data & Listing Services
The data business includes distribution of historical and real time market data to online brokers, institutional investors and data distributors while the Listing business thrives on IPO activity and the entities listed on Nasdaq's exchanges, generating revenue from initial listing and annual renewal fees. Nasdaq's listing business has been gaining market share both in the US and Europe, boasting an impressive 76% average win rate for US IPOs over the last five years.
Source: Stratosphere.io (use coupon code STOCKOPINE for a 25% discount), StockOpine Analysis