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Morningstar | Nasdaq Increasingly a Data Company

Nasdaq is making the transition from being solely an equity exchange to a diversified data and technology company. Although Nasdaq's Market Services accounts for a little less than half of operating income, increasingly, investors should focus their attention on the company's information services (45% of operating income) business, which provides the market data investors need in order to trade. Historically, exchanges gave this data away to incentivize trading. Now, Nasdaq and other exchanges increasingly view this intangible asset as a profit center. Going forward, we believe a majority of Nasdaq's operating income will be realized through data sales while becoming less dependent upon trading volumes. Our biggest concern is what impact regulators will have on Nasdaq's ability to increase prices on data, bundle additional offerings, and market new data products. More recently, investors have objected to what they some believe have been overly aggressive price increases. The data Nasdaq derives from its trading operations is enormously valuable and there are potentially many different ways to mine and exploit new revenue opportunities. Given what a customer pays for data is opaque and often not comparable to other customers, we think it will be challenging for the SEC to effectively regulate. In addition, it's not apparent to us that high data costs are having a negative impact on the individual investor. How the SEC regulates exchanges data is the greatest risk to Nasdaq's fair value. In addition, given Nasdaq and its competitors' increased focus on selling proprietary data sets, we think it’s likely Nasdaq will continue to acquire additional data sets at possibly increasing multiples. In 2017, Nasdaq acquired eVestment for $705 million, which was about 8-9 times eVestment's sales at the time. This strikes us as expensive, but so long as Nasdaq believes it can acquire data sets and raise prices on it, it will probably view similar acquisitions favorably, which is why we think Nasdaq will continue to employ M&A to achieve greater growth.