Home Product listing Nasdaq reports strong earnings growth as indexation increases

Nasdaq reports strong earnings growth as indexation increases

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When the stock market breaks records, it usually means good things for the stock markets. Nasdaq (NASDAQ: NDAQ) Second quarter results were recently released, which were driven by record trading volumes in the US equity and options markets in the first half of 2021. Even other Nasdaq businesses, which are less transaction sensitive, also have prosperous. The Nasdaq benefits from the growing popularity of more passive and less expensive investment strategies. This continued tailwind makes the Nasdaq more than just bullish action.

Image source: Getty Images.

How indexing boosts Nasdaq activity

The investment intelligence business, which includes data, analytics and indices, has experienced strong growth, driven strongly by the index activity of the Nasdaq. Every time an investor invests money in a product linked to a NASDAQ index, the company collects royalties. Assets under management of exchange traded products linked to the Nasdaq indices grew 53% year over year as more investors increasingly favor the lower management fees of indexing – a persistent trend during bull and bear markets.

Nasdaq was the leader in initial public offerings (IPOs) listing 135 in the quarter. The Nasdaq won 78% of the lists, compared to its competitor Intercontinental exchange (NYSE: ICE), which owns the New York Stock Exchange. In addition, he managed the cryptocurrency exchange platform offering Global Coinbase (NASDAQ: COIN), which was the largest direct listing in history. Direct listings allow companies to sell stocks directly to the public without an investment bank. The Nasdaq is working on other avenues to eliminate middlemen and allow companies to negotiate in the market at a lower cost.

The Nasdaq has been active in mergers and acquisitions

The Nasdaq has also been active on the acquisition and divestiture front, selling its fixed income trading operations to Tradeweb Markets. The company also made a strategic investment in Puro.earth, a carbon elimination market. Puro.earth allows companies to buy credits that offset their carbon footprint. Finally, the Nasdaq has integrated its Nasdaq Private Market service into a new joint venture with a consortium of major banks and Wall Street companies. Nasdaq Private Market allows private companies to conduct transactions such as takeover bids, block trades, and stock issues. With this solution, companies will be able to raise capital at a lower cost by eliminating the need for investment banks to perform these processes.

Not cheap, but not really overpriced either

The Nasdaq is trading at 27 times the EPS expected in 2021, which is near the top of its historical range. I wouldn’t say it’s expensive, but it’s also not a great deal at these prices:

PE NDAQ Ratio GraphNDAQ P / E ratio data by YCharts.

Like most of its competitors, the Nasdaq operates in a highly regulated industry with high barriers to entry. It is difficult for competitors to create new exchanges because investors want to go where most people are already trading. This means the Nasdaq will trade at a multiple of premium, especially against its non-GAAP earnings growth, which is expected to be 12% this year.

The Nasdaq also pays a quarterly dividend, but the 1.1% yield is small. However, the company has just increased its dividend by 10%. The stock is likely to be held at these levels, but would be attractive in the event of a pullback.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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