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Nasdaq Reports Strong Earnings Growth as Indexing Increases

By Brent Nyitray, CFA – Aug 6, 2021 at 11:11AM

Key Points

  • Strong trading volumes are driving growth.
  • The company's getting a boost from investors shift toward lower-cost indexing strategies.
  • The stock would be more attractive on a pullback.

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Growth is decent, but the stock is probably fully valued at these levels

When the stock market is setting records, that usually means good things for the stock exchanges. Nasdaq (NDAQ 0.71%) recently reported second-quarter earnings, which were driven by record trading volumes in the U.S. stock and options markets in the first half of 2021. Even Nasdaq's other businesses, which are less sensitive to trading, also prospered. Nasdaq is benefiting from the increasing popularity of more passive -- and lower-cost -- investing strategies. This ongoing tailwind makes Nasdaq more than simply a bull market stock.  

A trader at a bank of computer screens.

Image source: Getty Images.

How indexing's boosting Nasdaq's business

The investment intelligence business, which includes data, analytics, and indexes, saw strong growth, driven heavily by Nasdaq's index business. Every time an investor puts money in a product that is linked to a NASDAQ index, the company earns royalties. Assets under management in exchange-traded products linked to Nasdaq indexes rose 53% year over year, as more investors increasingly favor indexing's lower management fees -- a persistent trend during bull and bear markets. 

Nasdaq was the leader in initial public offerings (IPOs) listing 135 during the quarter. Nasdaq won 78% of the listings, compared to competitor Intercontinental Exchange (NYSE:ICE), which owns the New York Stock Exchange.  In addition, it ran the offering for cryptocurrency exchange platform Coinbase Global (COIN 5.30%), which was the largest direct listing in history. Direct listings allow companies to sell stock directly to the public without an investment bank. Nasdaq is working on other avenues to cut out the middleman and allow companies to transact in the market more cheaply. 

Nasdaq has been active in M&A

Nasdaq was also active in the acquisitions and dispositions front, selling its fixed-income trading operations to Tradeweb Markets. The company also made a strategic investment in Puro.earth,  a carbon removal marketplace. Puro.earth allows companies to purchase credits that offset their carbon footprints. Finally, Nasdaq entered its Nasdaq Private Market service into a new joint venture with a consortium of big banks and Wall Street firms. Nasdaq Private Market allows private companies to conduct transactions such as tender offers, block trades, and stock issues. Using this solution, companies will be able to raise capital more cheaply by eliminating the need for investment banks to run these processes.  

Not cheap, but not really overvalued, either

Nasdaq is trading at 27 times expected 2021 EPS, which is toward the high end of its historical range. I wouldn't say it is expensive, but it isn't a bargain at these prices, either:

NDAQ PE Ratio ChartNDAQ P/E ratio data by YCharts.

Like most of its competitors, Nasdaq operates in a highly regulated industry with large barriers to entry. It's hard for rivals to create new exchanges, because investors want to go where the most people are already trading. This means that Nasdaq will trade at a premium multiple, especially relative to its non-GAAP earnings growth, which is expected to be 12% this year.

Nasdaq also pays a quarterly dividend, but the 1.1% yield is on the small side. The company did just hike its dividend 10%, however. The stock is probably a hold at these levels, but would be attractive on a pullback. 

Brent Nyitray, CFA has no positions in the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

Stocks Mentioned

Nasdaq Stock Quote
Nasdaq
NDAQ
$68.98 (0.71%) $0.49
Coinbase Global Stock Quote
Coinbase Global
COIN
$47.67 (5.30%) $2.40

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

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