While the past year has been tough on the financial sector, not all financials have suffered. While banks and real estate investment trusts (REITs) were dealt a tough hand, the exchanges -- particularly Nasdaq (NDAQ 0.63%) -- benefited from the increased volatility.

But if high volatility helps when the market is anxious and trading activity is high, low volatility can hurt when things settle down. So Nasdaq has been taking steps to reduce its exposure to volatility by building ancillary businesses, and it made a splashy acquisition at the end of 2020 by acquiring Verafin, a company that detects financial fraud. Does that make it a buy today? Let's dig into its latest earnings and see.

Abstract picture of fintech

Image source: Getty Images.

A big jump in revenue

Nasdaq is primarily known for its namesake stock exchange, but the company does have other lines of business. It operates four basic segments: market services, corporate services, information services, and market technology. Market services includes trading and clearing services. Corporate services includes listing and corporate solutions, while information services includes Nasdaq data and indices. Finally, market technology provides infrastructure solutions for banks, regulators, and other stakeholders. 

For the quarter ending Dec. 31, Nasdaq generated $788 million in net revenue, an increase of 22% compared to the fourth quarter the year before. For the full year, total net revenue came in at $2.9 billion, an increase of 15% compared to 2019. Earnings per share rose 24% to $1.60 for the fourth quarter, and full-year earnings per share climbed by the same percentage to $6.18.

The fourth quarter was particularly robust with respect to new listings. Nasdaq introduced 142 initial public offerings, and boasted a 67% total win rate over the other exchanges. Equity options were a big bright spot for Nasdaq last quarter, with a 71% increase in volume to 741 million contracts.

Nasdaq is getting into crime fighting

Nasdaq also announced an agreement during the fourth quarter to acquire Verafin, a cloud-based platform that can detect, investigate, and report money laundering and financial fraud. Verafin currently serves more than 2,000 financial institutions. The transaction is expected to close in this year's first quarter, and Nasdaq projects that Verafin will deliver $140 million in revenue for the company in 2021. The acquisition is expected to be accretive to adjusted earnings beginning in 2022.

Ultimately, the Verafin acquisition and Nasdaq's other businesses will help reduce the company's reliance on stock market volatility to drive earnings. Volatility generally translates into higher trading volumes and revenue, but it also tends to revert to the mean. In other words, investors should expect more subdued growth if the market frenzy settles down. Another X factor for now is the GameStop saga, which could potentially usher in additional regulation. It's too early to tell if this will have an effect on the exchanges, but the whole episode has garnered the attention of regulators, and how they respond is an open question.

Nasdaq's other businesses did exhibit decent growth, with investment intelligence revenue rising 27% year over year on increased usage of proprietary products and license fees paid by index funds that benchmark to Nasdaq indices. Data revenue also rose 8%. The corporate services line of business experienced 8% growth due to increased demand for environmental, social, and governance (ESG) solutions. 

At Thursday morning's prices, Nasdaq is trading at 23 times expected 2021 earnings per share of $6.22. This is roughly flat earnings growth compared to 2020, and would almost seem to be building in a decrease in volumes and volatility this year. Since the other businesses are growing, and Verafin is set to add revenue, we should see stronger growth if trading volumes hold up. For 2022, the Street sees Nasdaq making $6.79, so this seems to be a 2021 phenomenon. And while Nasdaq isn't a big dividend payer, it does sport a 1.4% yield, and last year dividends only amounted to 32% of earnings per share, a very sustainable payout.

Industry leaders like Nasdaq have hard-to-replicate competitive moats, so their business models are more stable. While trading volumes will ebb and flow, the overall business is steady, especially if you're focused on the long term.