Shares of exchange operator Nasdaq (NDAQ) has been hit hard during this year’s market correction. This could be a buying opportunity for investors who are looking for a business model that features not only high growth rates, but also strong free cash flow and a decent dividend yield.
The company, which is home to some of the biggest names in tech, is set to report second quarter fiscal 2022 earnings results before the opening bell Wednesday. Driven by its leadership position in trading technology and stock exchange, Nasdaq's revenues have risen impressively over the past decade, including 10% increase in 2021 despite the adverse effects of the pandemic. Its revenue is derived not only from new listings, re-listings, and trading volume, it has access to trove of data it can use to create new products and services.
What’s more, Nasdaq has demonstrated a consistent ability to power through market volatility in a manner that other major exchanges have otherwise struggled. The company’s investments in trading technology, for example, enabled it to quickly adapt to the rapid shift towards digitization and an overall virtual world response during the pandemic. However, rising inflation, tightening monetary policy and the fear of a recession has created doubt about near-term growth expectations for some of the biggest names in tech.
Nasdaq, however, has a well-diversified business that doesn’t rely too heavily on trading activity and market-making services. As of the first quarter, roughly 74% of its revenue came from non-trading activities. The company has strategically grown its non-trading services (the solutions segment) which now produced about two-times higher organic revenue growth since 2018. This approach makes Nasdaq well-insulated from a market downturn. On Wednesday, investors will want to know whether these factors are still in play for the just-ended quarter and for the rest of the year.
In the three months that ended June, the New York-based company is expected to deliver earnings of $1.93 per share on revenue of $881.83 million. This compares to the year-ago quarter when earnings were $1.90 per share on $846 million in revenue. For the full year, ending December, earnings are projected to rise 4.7% to $7.84 per share, up from $7.56 a year ago, while full-year revenue of the $3.57 billion would rise 4.5% year over year.
While the company is broadly known for its equity exchange business, Nasdaq’s revenue base consists of the Market Services (trading arm) segment, Corporate Services, which offers listing services and investor relations products, the Information Services segment, which provides and distributes exchange data, and Market Technology. These collective businesses are expected to drive a year-over-year increase in earnings on higher revenues for the quarter.
Over the last four quarters, the company has beaten consensus EPS estimates four times. In the first quarter, Nasdaq delivered a top and bottom line beat, posting earnings of $1.97 per share, above the $1.93 expected. Q1 net revenue of $892 million was also strong, rising 5% year over year, topping consensus of $890 million. Just as impressive, the company’s annualized recurring revenue (ARR) rose 9% year over year, while annualized SaaS revenue rose 12%, accounting for 34% of ARR, which one percentage point higher than a year ago.
During the quarter, the Solutions Segments revenue of $576 million rose 15% year over year, offsetting a 3% decline in the Market Services revenue which came to $315 million. On Wednesday investors will want to see continued growth in these metrics, along with growth in both volume and listings.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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