While Nasdaq (NDAQ -0.28%) may be more well-known for its Nasdaq Composite index and its exchange's initial public offerings (IPOs), it is reimagining its long-term growth plan. With its $10.5 billion acquisition of financial software provider Adenza from Thoma Bravo in November, the company signaled its ambitions to become the "trusted fabric of the world's financial ecosystem," as Chief Executive Officer Adena Friedman put it.
However, due to the $6 billion in long-term debt it took on to fund that purchase, the market has taken a cautious view toward Nasdaq's stock, and it remains below its pre-acquisition announcement price. Nevertheless, despite having over $10 billion in total long-term debt on its books now, Nasdaq's new growth story and immense cash-generating capabilities leave the company's future looking incredibly bright.
Here's how Nasdaq could make this acquisition work and why it looks well positioned to extend its market-beating run of the last two decades.
Nasdaq's new look
Following its massive Adenza deal, Nasdaq restructured its operations into three business segments:
- Capital access platforms (41% of sales in Q4), comprised of the following units: data and listing services (IPOs), index (exchange-traded products tied to Nasdaq), and workflows and insights (analytics for asset managers and various corporate services). Nasdaq has been the listing leader for new IPOs for the last five years.
- Financial technology (36% of sales, including Adenza in Q4): Consisting of two units -- regulatory technology and capital markets technology -- this is where the Adenza acquisition fits in. Regulatory technology comprises AxiomSL (half of the Adenza purchase) and Verafin. Together, these groups cover areas like risk data management, regulatory reporting solutions, fraud and anti-money laundering, and surveillance for banks, insurers, and asset managers. Meanwhile, capital markets technology consists of Calypso (the other half of the Adenza deal) and market technology, which provide real-time risk management and decision-making, along with connectivity to Nasdaq's exchanges and data centers for financial institutions.
- Market services (22% of sales): Trading services for U.S. equities, U.S. options, and European equities. Currently holds the No. 1 market share in U.S. options and European equities (across Nordic countries).
The beauty of bringing Adenza into the fold is that it boosts Nasdaq's annualized recurring revenue to nearly 60% of its sales -- cushioning the company from the cyclicality of the listings and trading businesses. In addition to this stability, Nasdaq's new financial technology unit represents a new growth area for the company as it looks to patrol the financial markets, creating a safe, modern, transparent, and equitable environment for all involved.
According to a forecast by Grand View Research, spending on fraud prevention and anti-money laundering will grow at a compound annual rate of almost 16% through 2030. In that expanding market, Nasdaq's regulatory technology should play an essential role in combatting crime in the financial ecosystem for decades. Meanwhile, researchers at Future Market Insights anticipate that the regulatory reporting niche will grow at an annualized rate of 15% through 2033, as banks will be required to adhere to ever more stringent regulations over time. Nasdaq's solutions in that space could prove essential.
Showcasing the value seen in Nasdaq's up-and-coming unit, Adenza signed two central banks to deals in Q4, while Verafin added its first three Tier 1 banks as clients in 2023. With Nasdaq's inaugural Global Financial Crime report showing an estimated $3 trillion of illicit funds flowing through the financial ecosystem, the company's big bet on Adenza could pay huge dividends down the road.
New business structure, same mountain of free cash flow
While Nasdaq's $10 billion debt load may seem excessive compared to its market capitalization of $32 billion, its immense free-cash-flow (FCF) generation and FCF margin of 27% add a valuable layer of security.
NDAQ Revenue (TTM) data by YCharts.
Best yet for investors, its already-impressive FCF margin should only grow stronger as it integrates its acquisition. Adenza generated an impressive $306 million of pre-tax cash flows from $583 million in revenue during 2023 -- and those metrics could rise further as its new position as part of Nasdaq provides greater cross-selling opportunities.
Armed with this growing FCF creation, management aims to lower Nasdaq's debt load from 4.3 times EBITDA (earnings before interest, taxes, depreciation, and amortization) to 3.3 times within three years.
Despite that debt paydown plan, Nasdaq should easily be able to increase its dividend in 2024 for the 12th consecutive year -- its current payout (which offers a 1.5% dividend yield) only uses 25% of the company's FCF. Nasdaq has grown these payments at an annualized rate of 20% across the last decade, handsomely rewarding shareholders who have stayed with it over the long run.
Buoyed by this dividend, powerful FCF generation, and a long growth runway ahead in its niche of helping protect and regulate the financial markets, Nasdaq's stock looks promising at 18 times FCF -- even with its temporarily higher (but safe) debt balance.
