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When the stock market is setting records, it usually means good things for the stock markets. Nasdaq (NASDAQ: NDAQ) recently reported profits for the second quarter, which was driven by record trading volumes in the US stock and options markets in the first half of 2021. Even Nasdaq’s other companies, which are less sensitive to trading, also performed well. Nasdaq is benefiting from the increasing popularity of more passive – and cheaper – investment strategies. This ongoing tailwind makes Nasdaq more than just a bull market share.
Image source: Getty Images.
How indexing is boosting Nasdaq’s business
The investment intelligence business, which includes data, analytics and indexes, experienced strong growth, driven strongly by Nasdaq’s index business. Every time an investor puts money into a product that is linked to a NASDAQ index, the company earns royalties. Assets under management in exchange-traded products linked to Nasdaq indices rose 53% year over year as more investors prefer lower management fees to indexation — a continuing trend during bull and bear markets.
Nasdaq was the leader in initial public offerings (IPOs) with quotes of 135 during the quarter. Nasdaq won 78% of the lists, compared to competitor Intercontinental exchange (NYSE:ICE), owner of the New York Stock Exchange. In addition, it managed the offering for a cryptocurrency exchange platform Coinbase Worldwide (NASDAQ:COINS), which was the largest direct listing in history. Direct listings allow companies to sell shares directly to the public without an investment bank. Nasdaq is working on other avenues to cut out the middleman and allow companies to trade more cheaply in the market.
Nasdaq has been active in M&A
Nasdaq was also active in acquisitions and dispositions and sold its fixed income trading business to Tradeweb Markets. The company also made a strategic investment in Puro.earth, a marketplace for carbon removal. Puro.earth enables companies to purchase credits that offset their environmental footprint. Finally, Nasdaq has incorporated its Nasdaq Private Market service into a new joint venture with a consortium of major banks and Wall Street firms. Nasdaq Private Market allows private companies to conduct transactions such as bids, locks and share issues. Using this solution, companies will be able to raise cheaper capital by eliminating the need for investment banks to carry out these processes.
Not cheap, but not really overvalued either
Nasdaq is trading at 27 times projected 2021 earnings per share, which is at the high end of its historic range. I wouldn’t say it’s expensive, but it’s not a bargain at these prices either:
NDAQ P/E ratio data by YCharts.
Like most of its competitors, Nasdaq operates in a highly regulated industry with major barriers to entry. It is difficult for rivals to create new exchanges because investors want to go where most people already trade. This means Nasdaq will trade at a premium multiple, especially relative to non-GAAP earnings growth, which is expected to be 12% this year.
Nasdaq also pays a quarterly dividend, but the return of 1.1% is on the small side. However, the company has increased its dividend by 10%. The stock is likely to be a hold at these levels, but would be attractive in a downturn.
This article represents the opinion of the writer, who may disagree with the official recommendation of a premium consulting service from Motley Fool. Were fur! Questioning an investment thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.
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Sources 2/ https://www.fool.com/investing/2021/08/06/nasdaq-reports-strong-earnings-growth-as-indexing/ The mention sources can contact us to remove/changing this article |
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