The sell-off in technology and growth stocks over the past several months has also hit the company Nasdaq (NDAQ +0.65%) -- operator of its namesake stock market, among other securities-related businesses. The company's stock price is down by more than 15% so far in 2022, but is still trading up about 24% from where it was a year ago at this time. With a market capitalization, or company price tag, of roughly $30 billion, the stock now trades at 33 times its free cash flow.
With Nasdaq growing its annual net revenue by 18% year over year, the company appears fairly priced at this valuation. While the dividend is only yielding 1.2%, it has a streak of nine consecutive years of payout increases behind it. Part of the reason for the low yield is the strong price appreciation over the past year. With a dividend payout ratio of just 30%, there is plenty of room to safely enact further dividend hikes that can elevate the yield.
But beyond the fact that this is a premium company now trading at a reasonable price, there are two more reasons why Nasdaq is my favorite dividend growth stock to own in 2022.
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1. Nasdaq's recurring revenue and SaaS transformation is helping the bottom line
Led by CEO Adena Friedman, who holds an impressive 97% approval rating on Glassdoor, Nasdaq is gradually evolving into a recurring-revenue-focused operation. In the fourth quarter, annual recurring revenue (ARR) accounted for roughly 50% of total net sales.
That recurring revenue comes from subscription sales made with set contract values, as defined by Nasdaq. That's naturally advantageous, as it provides the business with a steady and predictable flow of cash -- and it's particularly useful for Nasdaq.
Because its largest segment, market services, primarily generates transaction-based sales, Nasdaq's burgeoning ARR and software-as-a-service (SaaS) revenue streams offer valuable financial stability. The SaaS business, in particular, brings the potential of higher margins for the company over the long term as it continues to build out its customer base and as its new software operations mature.
Annualized SaaS sales grew by 46% year over year in the fourth quarter and now account for 34% of Nasdaq's total ARR. Better still for investors, management expects that share of ARR to be between 40% and 50% by 2025, highlighting that its SaaS transformation may just be beginning.
The market technology unit and anti-financial crime operations are leading the SaaS charge for Nasdaq, especially following its $2.8 billion acquisition of Verafin, with its fraud and anti-money laundering focus. However, despite its priority focus on the anti-financial crime segment, that's far from the company's only growth area.
2. Nasdaq is expanding diversification and growth optionality
While Nasdaq's market and listing services businesses provide it with a steady and slowly growing core, management has highlighted four markets that offer immense potential for the company to expand into over the long haul.
| Business Segments | 2021 Revenue | SAM | Growth opportunity (SAM/Revenue) |
|---|---|---|---|
| Market Technology | $463 million | $9.5 billion | 21x |
| Analytics | $203 million | $7 billion | 34x |
| Index | $459 million | $1.6 billion | 3x |
| IR and ESG services | $226 million | $1.5 billion | 7x |
Source: Nasdaq Q4 2021 Earnings Call. SAM = Serviceable Addressable Market. IR = Investor Relations. ESG = Environmental, Social, and Governance.
In the market technology segment, Nasdaq is beautifully positioned to patrol the financial markets through its Verafin operations. In 2021 alone, 197 new financial institutions chose Verafin for its fraud and anti-money laundering services. Better still, in that up-and-coming business segment, 98% of new customers choose SaaS solutions from Nasdaq, leading to 129% year-over-year growth in annualized SaaS revenue for the fourth quarter. Market technology now accounts for nearly 50% of Nasdaq's total SaaS revenue, and with the largest addressable market among the company's four key growth areas, it will be pivotal to its long-term growth story.
The analytics segment offers the highest potential growth multiple of the group: The size of its serviceable addressable market in analytics is 34 times larger than its 2021 analytics revenue of $203 million. Notably, thanks largely to its 2020 acquisition of portfolio management provider Solovis, Nasdaq's analytics sales rose 17% year over year in the fourth quarter. Offering investments insights and information to its clients, Nasdaq grew new analytics sales by 47% during 2021, securing valuable long-term recurring revenue.
As for Nasdaq's index operations, sales grew 34% year over year in the fourth quarter, powered by 61 new ETFs that track various Nasdaq indexes launching in 2021. Perhaps best of all for investors, 67% of these new ETFs were started outside of the U.S., reflecting the global appeal of the technology-focused exchange.
When paired together, the index and analytics businesses make up Nasdaq's investment intelligence segment, which boasts a massive 67% operating income margin. Together, these two divisions offer unique investment possibilities to individual investors through ETFs and institutions with its broader market data.
Finally, Nasdaq's investor relations and environmental, social, and governance services act as a modern version of the razor-and-blades model when paired with its core listings operations. As the company approaches the milestone of having its 5,000th business list on its exchange, those services provide a beautiful complimentary offering for its customers to consider.
Through this budding division, the company aims to accelerate the conscious capitalism trend, offering unique insights regarding environmental, social, and governance monitoring, and investor relations more broadly.
Investor takeaway
Generating a free cash flow margin of 16% while only recording a payout ratio of 30%, Nasdaq is well-positioned to keep boosting its dividend payouts.
And its brand power and importance to the financial markets belie its relatively small market capitalization of $30 billion.
