Nasdaq (NDAQ 0.47%) and CME Group (CME 1.62%) are two of the most dominant exchanges in the world today. They connect millions of investors, who collectively trade more than $100 billion worth of financial assets every day. This makes them both important and highly valuable businesses.
Let's evaluate these exchange leaders in the following key areas to help you determine which is the best choice for your portfolio.
Competitive advantage
Nasdaq operates its namesake stock exchange, upon which more than 3,000 businesses representing over $10 trillion of market capitalization are listed. Together with the New York Stock Exchange, Nasdaq is essentially part of a duopoly that controls the lion's share of U.S. stock trading. That allows it to command relatively high listing fees from companies that want their shares to be traded on its network. Nasdaq has also built an attractive business around its proprietary market data, which it sells to investors seeking to gain an edge from its valuable trading information.
Billions of dollars of financial assets trade on Nasdaq's and CME Group's exchanges every day. Image source: Getty Images.
CME Group operates the world's largest exchange and clearinghouse for futures contracts -- which allow two parties to trade an asset at a set price on a specific date -- in areas including stock indexes, metals, currencies, interest rates, energy, and agricultural commodities. These increasingly popular financial instruments help businesses and individuals manage risk.
Like Nasdaq, CME benefits from network effects. The exchange's wide selection of products and unmatched liquidity attracts investors, who then provide more liquidity, which attracts more investors, and so on. It's a virtuous cycle that makes it difficult for competitors to encroach on CME Group's leading market position.
All told, both Nasdaq and CME Group enjoy powerful competitive advantages and strong leadership positions within their respective markets. There's no clear edge between the two, so let's call it a draw here.
Advantage: None
Financial strength
Let's now take a look at some key financial metrics to see how these two exchange giants compare.
|
Metric |
CME Group |
Nasdaq |
|---|---|---|
|
Revenue |
$3.97 billion |
$4.18 billion |
|
Operating income |
$2.50 billion |
$1.07 billion |
|
Operating cash flow |
$2.48 billion |
$0.97 billion |
|
Free cash flow |
$2.39 billion |
$0.85 billion |
|
Cash & investments |
$1.49 billion |
$0.35 billion |
|
Debt |
$3.42 billion |
$3.88 billion |
Data sources: Morningstar, Yahoo! Finance.
Nasdaq generated slightly more revenue than CME Group over the past year. Yet CME's highly efficient business model makes it one of the highest-margin businesses in the public markets: Its 63% operating margin exceeds even that of the highly profitable Nasdaq, which checks in at 26%. In turn, CME typically produces more than twice as much operating and free cash flow as its fellow exchange operator. It also has over $1 billion more in cash reserves. This gives CME the edge in terms of financial strength.
Advantage: CME Group
Growth
CME Group is also growing its profits at a faster clip. Wall Street expects the exchange operator to increase its earnings per share at nearly 18% annually over the next five years, fueled by rising futures trading volumes. Nasdaq's EPS, meanwhile, is forecasted to rise by 13% annually during this period, driven largely by the expansion of its information services business. Thus CME has the edge in terms of expected earnings growth in the coming years.
Advantage: CME Group
Valuation
Finally, let's review some value metrics, including price-to-free cash flow (P/FCF), price-to-earnings (P/E), and price-to-earnings-to-growth (PEG) ratios.
|
Metric |
CME Group |
Nasdaq |
|---|---|---|
|
P/FCF |
27.51 |
15.41 |
|
Forward P/E |
24.90 |
15.26 |
|
PEG |
1.54 |
1.28 |
Data sources: Yahoo! Finance, Morningstar.
Nasdaq's stock is significantly less expensive than that of CME Group. Its shares are 44% and 39% cheaper per dollar of free cash flow and expected earnings, respectively.
Nasdaq's stock is priced lower even if we account for CME's higher projected earnings growth rate, as we do with the PEG ratio. As such, Nasdaq's stock is currently the bigger bargain.
Advantage: Nasdaq
The better buy: you decide
Nasdaq and CME Group are both excellent businesses. But if you're trying to choose only one stock to buy, you can decide which of these factors is most important to you. For example, value investors will likely gravitate more toward Nasdaq's more attractively priced shares, while growth-focused investors may be more intrigued by CME Group's superior earnings growth prospects. Either way, you'll be investing in a high-quality company with strong competitive advantages.
In fact, your best option may simply be to purchase shares in both Nasdaq and CME Group. Doing so will give you the opportunity to profit alongside both of these exchange leaders in the years ahead.
Check out the latest Nasdaq and CME Group earnings call transcripts.
