Nasdaq Inc

I initiated a position last week

Every experienced investor knows that financials with a technological bent can be very profitable and successful in stock market terms. We’re talking about companies like Visa, Mastercard, S&P Global, Factset, MSCI, and more. But what about Nasdaq Inc.(NDAQ)? I sense that investors have left this high-quality company out of the running, so I recently initiated a position here. 

I only bought 100 shares, so it’s a small position for me, but I intend to add to it, if everything pans out as I imagine. 

I haven’t studied the company in detail. This is more an invest first, investigate later situation. I have perused NDAQ’s historical accounts, read some earnings presentations, and done a back-of-the-envelope valuation. What I’ve learned makes me confident enough to vouch for the company. Here are the reasons for my buying decision. 

Great technical setup

NDAQ reached an all-time high (ATH) in the zero interest days of the pandemic, went down in 2022, and has found its footing again around today's level. This year the stock has been consolidating just above $60. There is a gap to be filled up to ATH around $70, and there's a good chance the gap will be filled fairly soon. 

High growth imminent

NDAQ is known for its stock market indexes. Naturally, listing services are a big part of its revenue stream. 

The market for new listings has stayed dormant for a while now. Many think IPOs and M&A will reawaken soon.  This is why investment banks have done great in the stock market lately. NDAQ will also benefit from such a turnaround, but so far, it has languished compared to investment banks.

For those investors who want to play this expected turnaround, Goldman Sachs and ABG Sundal Collier (Norway) can be good plays here. Especially ABG is dirt cheap.

When I choose to invest in NDAQ, it goes beyond short-term considerations. NDAQ has long-term compounding qualities enabling it to manage cycles better than investment banks. 

Recurring revenues

NDAQ’s main focus is growing annual recurring revenues (ARR). Here are some of the products that drive growth in recurring revenues.

AxiomSL is a software-as-a-service (SaaS) platform that provides regulatory and compliance solutions to financial institutions. 

Calypso is a SaaS that helps financial institutions manage various forms of collateral (money management/workflows).

AxiomSL and Calypso are assets that NDAQ acquired recently and grew by 16% last year.

Verafin is a SaaS that helps financial institutions detect fraud, money laundering, and more. NDAQ has launched the Verafin co-pilot, thereby stepping into the AI age. Verafin co-pilot cuts alert review time by 90%, making their customers deal with issues faster. 

Formerly known as SMARTS, NDAQ’s surveillance platform is designed to provide market participants, exchanges, and regulators with global cross-market, multi-asset, multi-venue trade surveillance and market risk functionality.

Various SaaS solutions provide 36% of NDAQ’s ARR. The company believes this number will grow to 50% by 2030, making it the fastest growth category in NDAQ’s suite of products. 

In total ARR grew by 7% last year.

Debt

NDAQ has made some acquisitions that need to be paid down. The debt situation weighs temporarily on the share price. However, the company has a strategy to deleverage its debt to EBITDA ratio which currently stands at 4. It’s a bit high, but NDAQ has deleveraged fairly fast in the last quarters. The company generates a lot of free cash flow and provides investors with a growing dividend. The payout ratio is low, so the company has ample room to deliver on its aggressive deleveraging strategy.

Valuation

I give NDAQ a fair value estimate of $70, a few percentage points above Wall Street consensus. 

We have to see how it goes.

Disclaimer: Important Information for Retail Investors

The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.

The author is a retail investor, not a licensed advisor. Content accuracy isn't guaranteed due to changing market conditions. All investments have risks, including the potential loss of principal. Assess risk tolerance and goals before investing; diversification is key to managing risk.

The author may have positions in the mentioned stocks, which can change without notice. Readers should do their due diligence and consult professionals before acting on blog information.

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