Long-Term Wealth Generation With Nasdaq Inc.
" After covering CME and Cboe, it's time to look at another wealth-generating powerhouse: Nasdaq. The company has tremendous free cash flow capabilities thanks to a fantastic business model and high expected future growth. The stock isn't cheap, but I think it's still a good deal for dividend growth investors with a long-time horizon.
It's time to take a look at Nasdaq, Inc. (NASDAQ:NDAQ). Not the index but the company. I had the company on a list for a very long time, but I never took the time to actually dive into its business models and financials. In the recent past, I discussed two of its peers: Cboe Global Markets (NYSE:CBOE), and CME Group (NASDAQ:CME), which is the reason why I picked up my NDAQ research again. I think NDAQ is a great stock for long-term investors despite its relatively low dividend yield and the fact that the stock has rallied more than 40% this year. Nasdaq is a great investment for a number of reasons. The company benefits from higher trading volume and corporate actions like IPOs. Additionally, Nasdaq has evolved into a company that makes a fortune selling data and related services. This has caused a strong and increasing stream of free cash flow used to increase dividend payments, financial health, and buybacks. Unfortunately, these buybacks are only leading to an unchanged number of shares outstanding as it merely offsets stock-based compensation. Nonetheless, the pros easily outweigh the cons and make NDAQ a good dividend growth investment. In this article, I will give you the details.
How NDAQ Makes Money
Nasdaq is a company operating in the financial data & stock exchanges industry. The company has a $31 billion market cap and is founded and headquartered in New York. The company is flying under the radar as investors are mainly interested in the companies that are Nasdaq-listed - i.e., FANG+ stocks.
The thing about Nasdaq, and most of its peers, is that it takes some time to figure out how they make money. In the case of Nasdaq, we're dealing with a product portfolio that goes well beyond market services based on transaction revenue. Basically, we're dealing with technology & analytics (the purple area below) and the foundational marketplace core (the green area).
What this entails is that the company owns the single largest equity market in the United States. The company also has the number one market share in U.S. equity derivatives and Nordic equities (Nasdaq Baltic exchanges). Its corporate platform includes listing services like IPO's (including SPACs) and direct listings. It also includes companies that switch from alternative exchanges. In 2020, the company supported 316 IPOs, 20 switches from other exchanges, 46 upgrades from OTC, and 72 EPTs and other listings.
On top of that, Nasdaq sells proprietary data to customers and develops and licenses Nasdaq-branded indexes and financial products.
Since 2017 sales have grown by roughly 8% per year (CAGR). This was mainly caused by its booming technology-focused segments. Market technology revenue has doubled since 2016. When adding revenues from investment intelligence, the company has generated 81% growth in these segments since 2016.
On top of that, the company has plans to rapidly expand its non-trading business as it focuses on cloud-enabled market platforms, trade surveillance automation, better analytics to allow investors to be more effective, and new ESG solutions for corporate issuers.
None of this should come as a surprise as SaaS (software as a service) has been booming. Nasdaq's SaaS revenues have improved by 22% per year since 2016. As of 2Q21, these SaaS revenues account for 34% of total sales. This is expected to rise to at least 40% in 2025(!). And speaking of 2025, until then, the company expects organic revenue growth to be between 13-16% per year.
How Investors Benefit
In this case, we're dealing with a company that can easily leverage its services without the need to accelerate capital expenditures - like companies that produce physical products. Hence, the company is now able to generate close to $2.0 billion in EBITDA thanks to >55% EBITDA margins. As a result, free cash flow is close to $1.2 billion. That's a 3.9% FCF yield based on a $31 billion market cap. The company's current dividend yield is 1.15%, which means there's a lot of room to further accelerate dividends - even if FCF remains flat.
The company also engages in stock buybacks. On a TTM basis, the company has generated roughly $700 million in FCF. That's lower than usual due to investments in working capital. During this period, the company paid $331 million in dividends and bought back shares worth $536 million. However, these buybacks merely cover stock-based compensation, which is why the company's diluted number of shares outstanding has been flat for years. That's why we should view 'buybacks' a bit differently based on this context.
Nonetheless, dividend growth is great. While it might look like the company is seeing a significant slowdown in dividend growth, I should note that the company raised its dividend by 10.2% in April. That's not visible in the chart below.
The best thing is that NDAQ has delivered a ton of value. The stock has outperformed every major ETF and its 'peers' - especially on a total-return basis. This is obviously not a guarantee that this will continue, but I think it will, given the company's portfolio and ability to grow both its top and bottom line.
So, what about valuation?
The valuation isn't cheap, but it reflects the company's capabilities. Using a $31 billion market cap and $3.9 billion in expected net debt, we get an enterprise value of roughly $34.9 billion. That's roughly 17.9x next year's EBITDA. Besides that, the data also shows that the company maintains a healthy balance sheet with a net debt leverage ratio of roughly 2.0x EBITDA.
Given the company's historic valuation range, we're dealing with a somewhat lofty valuation. Since the pandemic, the valuation has moved above 16.0x. That does make sense for two reasons. First of all, the stock market's valuation has gone up. The second reason is based on the company's expected growth rates and success in the SaaS space. There's not really a need to wait for a 'cheap' valuation as that probably won't happen anyway. Unfortunately, its dividend yield is at multi-year lows. The same happened to the S&P 500 yield. That doesn't make it less bad, but it shows that investors are hungry for quality yield.
I like Nasdaq a lot. It's now the third company in this industry I want to add to my portfolio after covering CBOE and CME. Nasdaq is extremely well-positioned to benefit from growth in transactions and corporate actions and its SaaS operations. This will keep sales growth elevated and support strong growth in free cash flow. The company's yield is low, but I have little doubt that Nasdaq will generate outperforming dividend growth and outperforming capital gains on a long-term basis. The only problem I see is that its dividend yield is low. I don't like it but it doesn't stop me. It could, however, be a problem for income-oriented investors (retirees).
Last but not least, NDAQ is evolving into a data powerhouse thanks to its products and ability to grow in an area fueled by an ever-increasing need for data and real-time research solutions. Not a lot of companies can compete with that. "
- Seeking Alpha
" After covering CME and Cboe, it's time to look at another wealth-generating powerhouse: Nasdaq. The company has tremendous free cash flow capabilities thanks to a fantastic business model and high expected future growth. The stock isn't cheap, but I think it's still a good deal for dividend growth investors with a long-time horizon.
It's time to take a look at Nasdaq, Inc. (NASDAQ:NDAQ). Not the index but the company. I had the company on a list for a very long time, but I never took the time to actually dive into its business models and financials. In the recent past, I discussed two of its peers: Cboe Global Markets (NYSE:CBOE), and CME Group (NASDAQ:CME), which is the reason why I picked up my NDAQ research again. I think NDAQ is a great stock for long-term investors despite its relatively low dividend yield and the fact that the stock has rallied more than 40% this year. Nasdaq is a great investment for a number of reasons. The company benefits from higher trading volume and corporate actions like IPOs. Additionally, Nasdaq has evolved into a company that makes a fortune selling data and related services. This has caused a strong and increasing stream of free cash flow used to increase dividend payments, financial health, and buybacks. Unfortunately, these buybacks are only leading to an unchanged number of shares outstanding as it merely offsets stock-based compensation. Nonetheless, the pros easily outweigh the cons and make NDAQ a good dividend growth investment. In this article, I will give you the details.
How NDAQ Makes Money
Nasdaq is a company operating in the financial data & stock exchanges industry. The company has a $31 billion market cap and is founded and headquartered in New York. The company is flying under the radar as investors are mainly interested in the companies that are Nasdaq-listed - i.e., FANG+ stocks.
The thing about Nasdaq, and most of its peers, is that it takes some time to figure out how they make money. In the case of Nasdaq, we're dealing with a product portfolio that goes well beyond market services based on transaction revenue. Basically, we're dealing with technology & analytics (the purple area below) and the foundational marketplace core (the green area).
What this entails is that the company owns the single largest equity market in the United States. The company also has the number one market share in U.S. equity derivatives and Nordic equities (Nasdaq Baltic exchanges). Its corporate platform includes listing services like IPO's (including SPACs) and direct listings. It also includes companies that switch from alternative exchanges. In 2020, the company supported 316 IPOs, 20 switches from other exchanges, 46 upgrades from OTC, and 72 EPTs and other listings.
On top of that, Nasdaq sells proprietary data to customers and develops and licenses Nasdaq-branded indexes and financial products.
Since 2017 sales have grown by roughly 8% per year (CAGR). This was mainly caused by its booming technology-focused segments. Market technology revenue has doubled since 2016. When adding revenues from investment intelligence, the company has generated 81% growth in these segments since 2016.
On top of that, the company has plans to rapidly expand its non-trading business as it focuses on cloud-enabled market platforms, trade surveillance automation, better analytics to allow investors to be more effective, and new ESG solutions for corporate issuers.
None of this should come as a surprise as SaaS (software as a service) has been booming. Nasdaq's SaaS revenues have improved by 22% per year since 2016. As of 2Q21, these SaaS revenues account for 34% of total sales. This is expected to rise to at least 40% in 2025(!). And speaking of 2025, until then, the company expects organic revenue growth to be between 13-16% per year.
How Investors Benefit
In this case, we're dealing with a company that can easily leverage its services without the need to accelerate capital expenditures - like companies that produce physical products. Hence, the company is now able to generate close to $2.0 billion in EBITDA thanks to >55% EBITDA margins. As a result, free cash flow is close to $1.2 billion. That's a 3.9% FCF yield based on a $31 billion market cap. The company's current dividend yield is 1.15%, which means there's a lot of room to further accelerate dividends - even if FCF remains flat.
The company also engages in stock buybacks. On a TTM basis, the company has generated roughly $700 million in FCF. That's lower than usual due to investments in working capital. During this period, the company paid $331 million in dividends and bought back shares worth $536 million. However, these buybacks merely cover stock-based compensation, which is why the company's diluted number of shares outstanding has been flat for years. That's why we should view 'buybacks' a bit differently based on this context.
Nonetheless, dividend growth is great. While it might look like the company is seeing a significant slowdown in dividend growth, I should note that the company raised its dividend by 10.2% in April. That's not visible in the chart below.
The best thing is that NDAQ has delivered a ton of value. The stock has outperformed every major ETF and its 'peers' - especially on a total-return basis. This is obviously not a guarantee that this will continue, but I think it will, given the company's portfolio and ability to grow both its top and bottom line.
So, what about valuation?
The valuation isn't cheap, but it reflects the company's capabilities. Using a $31 billion market cap and $3.9 billion in expected net debt, we get an enterprise value of roughly $34.9 billion. That's roughly 17.9x next year's EBITDA. Besides that, the data also shows that the company maintains a healthy balance sheet with a net debt leverage ratio of roughly 2.0x EBITDA.
Given the company's historic valuation range, we're dealing with a somewhat lofty valuation. Since the pandemic, the valuation has moved above 16.0x. That does make sense for two reasons. First of all, the stock market's valuation has gone up. The second reason is based on the company's expected growth rates and success in the SaaS space. There's not really a need to wait for a 'cheap' valuation as that probably won't happen anyway. Unfortunately, its dividend yield is at multi-year lows. The same happened to the S&P 500 yield. That doesn't make it less bad, but it shows that investors are hungry for quality yield.
I like Nasdaq a lot. It's now the third company in this industry I want to add to my portfolio after covering CBOE and CME. Nasdaq is extremely well-positioned to benefit from growth in transactions and corporate actions and its SaaS operations. This will keep sales growth elevated and support strong growth in free cash flow. The company's yield is low, but I have little doubt that Nasdaq will generate outperforming dividend growth and outperforming capital gains on a long-term basis. The only problem I see is that its dividend yield is low. I don't like it but it doesn't stop me. It could, however, be a problem for income-oriented investors (retirees).
Last but not least, NDAQ is evolving into a data powerhouse thanks to its products and ability to grow in an area fueled by an ever-increasing need for data and real-time research solutions. Not a lot of companies can compete with that. "
- Seeking Alpha