EUR 850.00 For Business Accounts Only

Morningstar | NDAQ Updated Star Rating from 31 Jan 2019

Narrow-moat Nasdaq finished 2018 in line with our expectation that renewed volatility would serve as a tailwind for Nasdaq and other exchanges. For the year, the exchange operator generated revenue of $2.5 billion representing organic growth of 8%. During the final three months of 2018, Nasdaq produced organic year-over-year growth of 11% resulting in sales of $645 million. This quarter’s performance was largely driven by an acceleration in Nasdaq’s exchange businesses which saw net revenue increase 12.2%. Volatility certainly was Nasdaq’s friend as average daily trading volume on Nasdaq’s equity exchanges increased 14.9%. Excluding Nasdaq’s fixed income and commodities revenue, this volatility drove strong growth across all of Nasdaq equity and derivative trading revenue. All this growth in trading led Nasdaq to pretax income of $328 million representing growth of nearly 55%. We’ll be adjusting our model to include full-year 2018 results, but do not anticipate any changes to our fair value estimate of $74 per share.

More importantly, today Nasdaq announced a $770 million bid for Oslo Bors that would serve to unite Nasdaq’s Nordic assets. This bid represents a 38% premium to unaffected market price and is a 5% premium to the offer made by Euronext. For Nasdaq, we think it’s possible marrying the exchange with the company’s existing technology assets could result in some cost synergies. However, if the deal is mostly motivated by a desire to support CEO Adena Friedman’s efforts to grow its Market Technology business, we would be more skeptical.

Nasdaq’s bid could kick off a bidding war for the exchange with Euronext. Given Nasdaq announced it expects the acquisition to generate an ROIC exceeding 10% within three to five years, we doubt Nasdaq has significant room to increase its bid without diluting its current consolidated returns on invested capital. By our math, the current bid values the exchange at an EV/EBIT of close to 15 which isn’t terribly expensive. Management has said that it has been growing revenue by 5% in recent periods, that’s likely on the higher side of what investors could expect for organic growth. For now, we are neutral on the deal until we can gather more information on synergies and strategic rationale.

During the call, management brushed aside its customers’ announcement they’d be partnering to build a rival trading venue called Members Exchange, or MEMX. Though we don’t expect MEMX to eat into Nasdaq’s business anytime soon and it’s possible the exchange will never be built, we do regard this move as something investors should take seriously. We believe it’s possible someday a trading venue owned by its members could become the dominant venue for equity trading. However, this will take time. MEMX will need to build its technological infrastructure, satisfy regulatory requirements and do all its hiring. Right now, beyond the existence of a website and press release, we can find little tangible evidence of MEMX’s progress toward becoming an exchange. We can find only one person employed by MEMX on LinkedIn named Jim Doe which we suspect is a fake account. Though MEMX may not be far along, we do believe it would be wrong to dismiss the threat MEMX could pose to Nasdaq and its moat.

Beyond Nasdaq’s exchange operations, the company’s information services segment produced strong organic growth of 11% in 2018. This quarter’s revenue performance in data was mostly driven by exceptional performance in Nasdaq’s index business which produced growth of 17.4% which almost perfectly corresponded with a 17.6% increase in average assets under management for products linked to Nasdaq indexes. Also, Nasdaq’s 2017 acquisition eVestment continues to grow at double-digit rates and in October hit the 1-year anniversary since being acquired. Management attributes its growth not to pricing action, but to growth in international customers.