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Nasdaq Trading Near 52-Week High: How Should You Play the Stock?

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Shares of Nasdaq Inc. (NDAQ - Free Report) closed at $73.05 on Tuesday, near its 52-week high of $74.88, after having gained 21.4% in the past three months. Shares outperformed the industry, the Finance sector as well as the Zacks S&P 500 composite index in the same time frame.

Earnings of this company increased 12.7% in the last five years, better than the industry average of 9.8%. Nasdaq has been successful in maximizing opportunities as a technology and analytics provider and growing core marketplace business. Its focus on market technology and information services businesses helps explore vast opportunities in line with its developmental strategies.

Nasdaq Outperforms Industry, Sector & S&P in 3 Months

Zacks Investment Research
Image Source: Zacks Investment Research

NDAQ shares are trading well above the 50-day moving average, indicating a bullish trend.  

Mixed Analyst Sentiment for NDAQ

Two of the 11 analysts covering the stock have raised estimates for 2024 and 2025 while two have lowered the same for both years over the past 30 days. In aggregate, the Zacks Consensus Estimate for 2024 and 2025 has moved 1 cent north each, respectively, in the past 30 days.

The Zacks Consensus Estimate for 2024 implies a 2.5% year-over-year decrease, while the same for 2025 suggests a 12.8% increase. The expected long-term earnings growth rate is pegged at 8.9%, better than the industry’s growth rate of 8.5%.

Average Target Price for NDAQ Suggests an Upside

Based on short-term price targets offered by 18 analysts, the Zacks average price target is at $76.50 per share. The average suggests a potential 4.7% upside from Tuesday’s closing price.

NDAQ’s Favorable Return on Capital

Return on equity, reflecting the company’s efficiency in utilizing shareholders' funds, was 15.5% in the trailing 12 months, better than the industry average of 13.2%.

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. ROIC in the trailing 12 months was 6.6%, higher than the industry average of 4.9%.

NDAQ’s Growth Strategy

Nasdaq remains focused on 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 boosts 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%.

Nasdaq is investing in proprietary data, migrating markets and SaaS solutions to capitalize on the growth opportunities in the cryptocurrency markets.

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 leading to net margin contraction over time. 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, indicating 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.

NDAQ Shares Expensive

The stock is overvalued compared to its industry. It is currently trading at a price-to-earnings multiple of 24.23, higher than the industry average of 24.05.

Shares of other players like Intercontinental Exchange, Inc. (ICE - Free Report) , MarketAxess Holdings Inc. (MKTX - Free Report) and CME Group (CME - Free Report) are also trading at a multiple higher than the industry.

What Should Be Your Approach?

Nasdaq is a leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services.  Impressive organic growth, ramping up of on-trading revenue base and strategic buyouts to capitalize on growing market opportunities poise it well for growth.

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. Notably, its free cash flow conversion has remained more than 100% over the last many quarters, reflecting its solid earnings.

Yet, higher expenses and increasing debt with lower times interest earned keep us cautious.

Thus, given a premium valuation, it is better to adopt a wait-and-see approach for this Zacks Rank #3 (Hold) stock in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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