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Here's Why You Should Retain Nasdaq (NDAQ) in Your Portfolio
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Nasdaq’s (NDAQ - Free Report) impressive organic growth, ramping up of on-trading revenue base, strategic buyouts to capitalize on growing market opportunities and effective capital deployment make it worth retaining in one’s portfolio.
Earnings of this Zacks Rank #3 (Hold) company increased 12.7% in the last five years, better than the industry average of 9.8%. Nasdaq has a decent history of beating estimates in three of the last four reported quarters while missing in one.
An Outperformer
Year to date, the stock has gained 3.5% compared with the industry’s rise of 0.2%.
Image Source: Zacks Investment Research
Return on Capital
Return on equity, reflecting the company’s efficiency in utilizing shareholders' funds, was 17% in the trailing 12 months, better than the industry average of 13.1%.
Return on invested capital has stayed around 10% over the last few years. The company has raised its capital investment significantly, reflecting its efficiency in utilizing funds to generate income.
Growth Drivers
Nasdaq’s growth strategy encompasses generating more revenues from high-growth Market Technology and Investment Intelligence segments, forwarding R&D spending toward higher-growth products, expanding its Anti-Financial Crime clientele as well as making innovations. NDAQ targets 5-7% long-term growth from a non-trading revenue base.
The company estimates strong growth from its index and analytics businesses and moderate growth in its exchange data products across U.S. and Nordic equities. Nasdaq estimates 5-8% revenue organic growth in Investment Intelligence, 13-16% in Market Technology and 3-5% in Corporate Platform segments over the medium term.
Its inorganic growth is impressive. The Adenza Group buyout boosted its Marketplace Technology and Anti-Financial Crime solutions apart from strengthening offerings across a wider spectrum of regulatory technology, compliance and risk management solutions. Nasdaq estimates Solutions Business's medium-term organic revenue growth to be in the range of 8-11%.
Given opportunities in the cryptocurrency markets, NDAQ is investing in proprietary data and migrating markets and SaaS solutions.
Nasdaq noted that the anti-fin crime space has a total addressable market of $12.5 billion and is expected to witness a CAGR of 17% through 2024. Verafin consolidated Nasdaq's established reg tech leadership to create a global SaaS leader. Nasdaq aims to achieve 40-50% SaaS revenues as a percentage of total revenues by 2025.
All these positives combined together poise NDAQ for long-term growth. The expected long-term earnings growth rate is pegged at 8%. We estimate the 2026 bottom line to increase at a three-year CAGR of 6.3%.
Risks
Nasdaq has been incurring higher expenses that weigh on operating margin. It raised the low end of its non-GAAP operating expense guidance to the range of $2.125 billion to $2.185 billion for 2024, a 5% increase from 2023. Nasdaq expects non-GAAP operating expense growth of 5% to 8% over the medium term.
Due to a change in corporate structure, NDAQ is estimated to incur $115 million to $145 million in pretax charges, of which about 40% will be non-cash charges. Nonetheless, this will help unlock revenue synergies. Nasdaq estimates benefits in the form of combined annual run rate operating efficiencies and revenue synergies of at least $30 million by 2025.
Nasdaq’s debt has been increasing over the last few years, with the debt-to-equity ratio comparing unfavorably with the industry average. Lower times interest earned is also a concern.
Wealth Distribution
Nasdaq has steadily increased its dividend each year and will continue to do so to achieve a dividend payout ratio of 35-38% by 2027. It also has $1.9 billion remaining under its board-authorized share repurchase program.
Notably, its free cash flow conversion has remained more than 100% over the last many quarters, reflecting its solid earnings.
Coinbase has a solid track record of beating earnings estimates in the last four quarters. COIN stock has gained 44.2% year to date. The Zacks Consensus Estimate for COIN’s 2024 EPS indicates a year-over-year increase of 386.5%.
HCI Group’s earnings surpassed estimates in each of the last four quarters, the average beat being 139.15%. In the past year, shares of HCI have gained 3.4%. The Zacks Consensus Estimate for HCI’s 2024 and 2025 earnings implies 57.6% and 4.3% year-over-year growth, respectively.
Palomar’s earnings surpassed estimates in each of the last four quarters, the average earnings surprise being 15.10%. In the past year, PLMR’s stock has surged 40.9%. The Zacks Consensus Estimate for PLMR’s 2024 and 2025 earnings indicates 26% and 18% year-over-year growth, respectively.
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Here's Why You Should Retain Nasdaq (NDAQ) in Your Portfolio
Nasdaq’s (NDAQ - Free Report) impressive organic growth, ramping up of on-trading revenue base, strategic buyouts to capitalize on growing market opportunities and effective capital deployment make it worth retaining in one’s portfolio.
Earnings of this Zacks Rank #3 (Hold) company increased 12.7% in the last five years, better than the industry average of 9.8%. Nasdaq has a decent history of beating estimates in three of the last four reported quarters while missing in one.
An Outperformer
Year to date, the stock has gained 3.5% compared with the industry’s rise of 0.2%.
Image Source: Zacks Investment Research
Return on Capital
Return on equity, reflecting the company’s efficiency in utilizing shareholders' funds, was 17% in the trailing 12 months, better than the industry average of 13.1%.
Return on invested capital has stayed around 10% over the last few years. The company has raised its capital investment significantly, reflecting its efficiency in utilizing funds to generate income.
Growth Drivers
Nasdaq’s growth strategy encompasses generating more revenues from high-growth Market Technology and Investment Intelligence segments, forwarding R&D spending toward higher-growth products, expanding its Anti-Financial Crime clientele as well as making innovations. NDAQ targets 5-7% long-term growth from a non-trading revenue base.
The company estimates strong growth from its index and analytics businesses and moderate growth in its exchange data products across U.S. and Nordic equities. Nasdaq estimates 5-8% revenue organic growth in Investment Intelligence, 13-16% in Market Technology and 3-5% in Corporate Platform segments over the medium term.
Its inorganic growth is impressive. The Adenza Group buyout boosted its Marketplace Technology and Anti-Financial Crime solutions apart from strengthening offerings across a wider spectrum of regulatory technology, compliance and risk management solutions. Nasdaq estimates Solutions Business's medium-term organic revenue growth to be in the range of 8-11%.
Given opportunities in the cryptocurrency markets, NDAQ is investing in proprietary data and migrating markets and SaaS solutions.
Nasdaq noted that the anti-fin crime space has a total addressable market of $12.5 billion and is expected to witness a CAGR of 17% through 2024. Verafin consolidated Nasdaq's established reg tech leadership to create a global SaaS leader. Nasdaq aims to achieve 40-50% SaaS revenues as a percentage of total revenues by 2025.
All these positives combined together poise NDAQ for long-term growth. The expected long-term earnings growth rate is pegged at 8%. We estimate the 2026 bottom line to increase at a three-year CAGR of 6.3%.
Risks
Nasdaq has been incurring higher expenses that weigh on operating margin. It raised the low end of its non-GAAP operating expense guidance to the range of $2.125 billion to $2.185 billion for 2024, a 5% increase from 2023. Nasdaq expects non-GAAP operating expense growth of 5% to 8% over the medium term.
Due to a change in corporate structure, NDAQ is estimated to incur $115 million to $145 million in pretax charges, of which about 40% will be non-cash charges. Nonetheless, this will help unlock revenue synergies. Nasdaq estimates benefits in the form of combined annual run rate operating efficiencies and revenue synergies of at least $30 million by 2025.
Nasdaq’s debt has been increasing over the last few years, with the debt-to-equity ratio comparing unfavorably with the industry average. Lower times interest earned is also a concern.
Wealth Distribution
Nasdaq has steadily increased its dividend each year and will continue to do so to achieve a dividend payout ratio of 35-38% by 2027. It also has $1.9 billion remaining under its board-authorized share repurchase program.
Notably, its free cash flow conversion has remained more than 100% over the last many quarters, reflecting its solid earnings.
Stocks to Consider
Some better-ranked stocks from the finance sector are Coinbase Global (COIN - Free Report) , HCI Group, Inc. (HCI - Free Report) and Palomar Holdings (PLMR - Free Report) . Each stock presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Coinbase has a solid track record of beating earnings estimates in the last four quarters. COIN stock has gained 44.2% year to date. The Zacks Consensus Estimate for COIN’s 2024 EPS indicates a year-over-year increase of 386.5%.
HCI Group’s earnings surpassed estimates in each of the last four quarters, the average beat being 139.15%. In the past year, shares of HCI have gained 3.4%. The Zacks Consensus Estimate for HCI’s 2024 and 2025 earnings implies 57.6% and 4.3% year-over-year growth, respectively.
Palomar’s earnings surpassed estimates in each of the last four quarters, the average earnings surprise being 15.10%. In the past year, PLMR’s stock has surged 40.9%. The Zacks Consensus Estimate for PLMR’s 2024 and 2025 earnings indicates 26% and 18% year-over-year growth, respectively.