Nasdaq, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 5/5

A global technology company operating capital markets and other diverse businesses, providing services like trading, data, analytics, and financial technology.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Nasdaq, Inc. (NDAQ) operates a complex and multifaceted business, encompassing exchanges, financial technology, and data and analytics. Its financial performance is directly tied to the volatility and stability of global financial markets, making it a rather cyclical business, while recent acquisitions in the financial tech side have made it less predictable.

Business Overview Nasdaq operates in three core segments: Market Platforms, Market Services, and Financial Technology.

  • Market Platforms: This segment includes Nasdaq’s global suite of exchanges, trading technology, and related infrastructure. It is where they facilitate trading in equities, options, futures, and fixed income, which is where the company is probably most well known.

    • This part of the business relies heavily on transaction volumes and price volatility, which are not completely under their control and can cause big swings in profitability and revenues

  • Market Services: This segment includes all the components needed to support their trading platforms, such as data analytics, market intelligence, brokerage services, and investor relations.

    • These services provide more stable revenue than trading, which is why NDAQ has focused more on them in recent years. The services are sold through subscription or recurring revenue contracts, which increases visibility and predictability of the revenue stream.

  • Financial Technology: This segment delivers solutions to customers in the financial services industry with services like banking infrastructure, financial crime management, and regulatory technology.

    • This segment is generally driven by long term trends of increased regulation and focus on financial security and technology. Contracts are typically multi-year which also provides better visibility to future income.

Moat Assessment While Nasdaq operates a critical market infrastructure, which could be seen as a potential moat source, it has limitations that affect it’s strength.

Economic moats derive from barriers that protect companies against competitive forces, therefore, creating high returns on invested capital for a long time.

  • Network Effects (Moderate): Nasdaq benefits from a network effect, especially within its equities and options trading businesses, where higher liquidity attracts more traders, thus making the platform more valuable. However, the competition, from other exchanges and fintech firms limits this moat’s strength, which is why I label it as moderate.
  • Intangible Assets (Narrow): Strong brand recognition as a global exchange provider, and their focus on high quality data, provides some level of moat to NDAQ. Data and indices businesses tend to be sticky. The competitive advantage comes from having a high level of reliability and brand, where users value information they can trust.
    • While this aspect of the business is hard to replicate, many competing financial information companies (Bloomberg, Thomson Reuters etc.) are also credible and established players in the market.
  • Switching Costs (Weak): Some services such as index data or trading and settlement systems are sticky. The costs of switching to new systems and learning new platforms, especially at the institutional level, could be a burden. However these are not usually impossible to replicate or surpass.
  • Economies of Scale (Weak): Nasdaq benefits from economies of scale in some of its businesses, like its trading platform and its clearing house, where fixed costs are spread over a larger volume. However, they’re not much more efficient in their operations compared to competing exchanges. This makes it easy for similar scale competitors to compete with them.

Overall Moat Rating: 3/5 - Narrow with Room for Improvement While Nasdaq has some competitive advantages, like the network effect in equities trading, and has also secured a stable income from sticky data and indices businesses, as well as a leading position in the stock exchange industry, these advantages are not too hard to replicate and can still be influenced by external trends. Thus I consider it to have a narrow moat, where they may be able to create a more secure and wider moat through their technology offerings over time.

Risks to the Moat and Business Resilience While Nasdaq does have a narrow moat, it is still susceptible to various risks:

  • Intense competition: Nasdaq faces intense competition in all its business areas. Exchange operators such as CBOE Global Markets, Intercontinental Exchange, and London Stock Exchange Group. Fintech companies like Bloomberg and Factset are also formidable competitors, which could potentially pressure the company’s margins and market share.
  • Regulatory and Legal Changes: Nasdaq is subject to intense regulation and oversight, and any regulatory changes in the stock exchange or financial tech business could hurt the company. Also, their operations can be affected greatly by potential actions and investigations, such as antitrust litigation or regulatory fines from governmental bodies.
  • Technological Disruption: Nasdaq operates in a fast-evolving and ever-changing technological landscape. They are vulnerable to disruptive innovations, and the rise of alternative trading systems as well as new trading tools can potentially undermine its business.
  • Macroeconomic Factors: Because Nasdaq is so heavily tied to global financial markets, they are very sensitive to global macro events, such as inflation, recession, and interest rate changes. In general, the company’s trading volumes are lower in bearish times which will lead to lower revenues for the company.
  • Data Security and Cyber Attacks: The exchange sector is an extremely tempting target for malicious attacks because they hold a lot of valuable and sensitive information. Any data breach or cyberattack that may affect client trust or reputation would hit the company’s stock valuation and business viability.

Business Resilience Despite these risks, Nasdaq exhibits moderate resilience. It’s diversified model into more recurring services, combined with the strong regulatory and economic role of exchanges makes them a long term play, with a relatively stable income profile. It has also been able to generate large amounts of cash flow, which can help sustain them in times of market volatility and stress.

Financial Overview Analyzing the financial data of NDAQ reveals some important characteristics:

  • Revenues:
  • The company’s business mix has become more recurring revenues based and they derive their income mainly through recurring subscription services and transaction-based trading fees.
  • Capital Access Platforms (mainly listing fees and investor relations), comprise a smaller, but solid portion, of their overall revenue.
  • Over the last few years the overall revenue growth has slowed a bit, but it is still growing at a moderate pace.
  • Profitability:
  • Operating margins are very strong, usually around 50 percent, suggesting high profitability and strong demand for their services.
  • However, their margins have declined in recent years, because of their increase in operating expenses, as they try to transition to tech-oriented businesses.
  • The increase in costs stems from hiring, and acquisitions that they have done recently.
  • Debt:
  • Nasdaq has a very strong balance sheet and large financial power. They have been using acquisitions to grow their revenue, which has resulted in some debt. However, their overall debt levels are low compared to their cash and liquid assets.
  • Free Cash Flows:
  • Nasdaq is able to generate strong cash flow, which gives them significant flexibility to re-invest in their business as well as repurchase their own shares and give out dividends.

Understandability Rating: 3 / 5 Nasdaq has an interesting and complex business model that is hard to completely grasp. While the basic idea of the company being an exchange is very straightforward, the company has a lot of different lines of business in a highly regulated and technology focused market. Due to that, I give the company a 3/5 in understandability.

Balance Sheet Health: 5 / 5 The company’s balance sheet is very healthy, as they have a good debt to assets and a large amount of liquid assets. Therefore, they also have ample room to continue to grow or weather any incoming financial crisis. This earns them a score of 5 / 5 in balance sheet health.

Recent Concerns/Controversies

  • Acquisitions: Nasdaq’s rapid acquisition activity has drawn some scrutiny about it’s high prices and its effect on the company’s balance sheet and management focus. NDAQ believes that such acquisitions, like the recent Adenza acquisition, provide a clear path to grow in recurring revenues and more growth from its financial technology services, which they hope to be more profitable.
  • Trading volumes: Trading volumes have also become an area of concern, due to the rise of other exchanges and the volatility in markets, which has caused some volatility in their trading revenues. The management states that they are investing in their new strategies and product offerings to compensate for reduced volatility in the market.
  • Competition: The rising levels of competition from fintech startups has posed a risk to the future of their business. They have tried to emphasize that having an integrated approach to financial services, combined with their data and trading, makes them a much better contender in the marketplace than most startups.