Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Better Buy: Nasdaq vs. Intercontinental Exchange

By Brent Nyitray, CFA - Jan 7, 2021 at 10:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Both have stock trading, but one has exposure to a hot sector.

Bull markets in equities are generally good things for the stock exchanges. Higher prices mean higher trading volumes and more fees.

Intercontinental Exchange ( ICE 0.23% ) and Nasdaq ( NDAQ -0.61% ) have been bright spots in the financial sector lately. Robinhood traders have been chasing the latest market darlings, which has boosted volumes, and as a result the markets have been hitting new highs. Stock exchanges have been a great place to be. But which one is the better buy?

Picture of a trading floor

Image source: Getty Images.

Intercontinental Exchange is best known for the New York Stock Exchange, but it has other valuable assets too. Euronext is Europe's biggest stock exchange, and the New York Board of Trade is a major U.S. derivatives exchange.

More than just exchanges

Intercontinental Exchange earns trading and clearing fees, and it sells data to media and financial firms. In addition, Intercontinental Exchange has a mortgage arm, which provides services to the mortgage industry. Intercontinental Exchange's mortgage technology business includes the Mortgage Electronic Registration System (MERS), which provides title and servicing information for mortgage lenders, servicers, and borrowers. This segment also recently acquired Ellie Mae, which provides mortgage services to mortgage lenders. 

Nasdaq is the other major U.S. stock trading venue. Like Intercontinental Exchange, Nasdaq earns trading and clearing fees and sells its data. Nasdaq also has some ancillary businesses, including corporate services, which provide listing and governance solutions. Nasdaq has benefited from the advent of commission-free trading, particularly via Robinhood investors, which is driving increased volumes. In the third quarter, average daily volumes were up 58% to 28.1 million shares. 

Given that both companies have hard-to-replicate business models, they tend to have high multiples for financial companies. Intercontinental Exchange currently trades at a 2021 price-to-earnings ratio of just under 24, while Nasdaq trades at a 2021 P/E of just under 22. Intercontinental Exchange is expected to show 6% earnings-per-share growth between 2021 and 2020, while Nasdaq is expected to be about flat. 

ICE PE Ratio (Forward) Chart

ICE PE Ratio (Forward) data by YCharts

Bullish on the mortgage sector

If stocks' bull market continues, both companies should benefit. That said, Intercontinental Exchange's mortgage arm provides the possibility for more growth. The Ellie Mae transaction was completed in early September, so its effect wasn't really reflected in 2020 numbers. The mortgage business will be at the mercy of interest rate movements; however, the Fed currently forecasts no rate increases for at least a couple of years.

Not only that, but according to some estimates, over 32 million borrowers will be able to save 0.75% on their mortgage rate by refinancing. Last year was the best for the mortgage origination business since the early 2000s, and given the demand for mortgages and a benign interest rate environment, the boom could last a bit longer.

The Mortgage Bankers Association is forecasting a decrease in origination volumes in 2021, but that is based on a forecast for rising rates in the second half of the year. If rates stay stable, those estimates will rise. Even if rates tick up, mortgage bankers may get more competitive to drive business. As a service provider, all the mortgage arm needs is volume.

One has an edge

So, which one is the better buy? I would have to side with ICE simply because I am bullish on the mortgage sector. The Fed recognizes that one of the easiest ways to get money in the hands of people is to lower their mortgage payment. Since it can directly affect mortgage rates via its purchases of mortgage backed securities, it has a lot of say in the matter.

As long as unemployment is elevated and the economy remains in a COVID-weakened state, the Fed will keep mortgage rates low. The mortgage arm will provide some upside potential to Intercontinental Exchange's earnings estimates for next year. Given that potential upside, I like Intercontinental Exchange over Nasdaq, despite the slightly higher multiple. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intercontinental Exchange, Inc. Stock Quote
Intercontinental Exchange, Inc.
ICE
$132.20 (0.23%) $0.30
Nasdaq, Inc. Stock Quote
Nasdaq, Inc.
NDAQ
$207.80 (-0.61%) $-1.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.