We have downgraded our recommendation on
NASDAQ OMX Group Inc.
) to Underperform from Neutral based on reduced investors'
confidence on the stock following the technical snags during the
) initial public offering (IPO). Weak first-quarter 2012 earnings
and headwinds related to volume and pricing are the other
NASDAQ's first-quarter 2012 operating earnings per share of 61
cents fell shy of the Zacks Consensus Estimate of 63 cents, but
were in line with the prior-year quarter earnings. GAAP net income
came in at $85 million or 48 cents per share, lagging behind $104
million or 57 cents per share recorded in the year-ago quarter.
NASDAQ continues to suffer from an eroding market share and weak
trading volumes, which is directly affected by economic and market
conditions, volatility of interest rates, inflation, changes in
price levels of securities and the overall level of investor
The company's matched market share executed in NASDAQ-listed
securities declined from 46% in 2007 to 27.7% in 2011, while the
combined matched market share in all U.S.-listed securities
declined from 29% in 2007 to 21.2% in 2011. This steady erosion
increases the operational and financial risk of the company.
Further, the technical glitches during the Facebook IPO dealt a
severe blow to investors' confidence. While the exchange has taken
steps to rectify the procedure for future IPOs, it is facing
lawsuits filed by disgruntled Facebook investors and the IPO is
being reviewed by the Securities and Exchange Commission and the
Financial Industry Regulatory Authority.
Moreover, the exchange was compelled to announce a $40 million
compensation for investors who lost money. However, the move failed
to pacify investors, who consider the compensation to be inadequate
to cover their losses. Rival
NYSE Euronext Inc.
) also protested against the compensation claiming that it provides
unfair competitive advantage to NASDAQ.
Nevertheless, NASDAQ continues to provide leading technology for
the world's competitive and demanding capital markets.The company's
next generation technology is capable of handling over one million
messages per second at an average speed of sub-250 microseconds,
currently the fastest in any exchange or alternative trading system
in the world.
The launch of NASDAQ's third retail equity stock options trading
platform - BX Options - is expected to attract retail investors,
thereby boosting trading volume. Further, the launch of MSCI
Emerging Markets and MSCI EAFE Index Options are expected to
provide competitive advantage to the exchange as they are the first
and only cash-settled options based on the EEMIQ and EAFEQ
NASDAQ currently carries a Zacks #3 Rank, implying a short-term
FACEBOOK INC-A (FB): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis
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