NDAQ is an interesting stock – but is it a good bargain? – TradersPro

One of the challenges for any investor, no matter what method they prefer to use, is how to find new, useful opportunities to put their money to work.

In that effort, one area that I think most investors don’t think about is investing in the companies that make access to the markets possible. I like to keep an eye on the Financial sector, especially as it relates to the ebb and flow of economic activity, and as well as to interest rates. Beyond the investment banks, brokerage houses, and mutual fund companies that I think most of us associate with the Financial sector, however are the companies that manage financial exchanges and track and provide access to all kinds of financial data (on individual companies as well as on the broad market itself).

Nasdaq Inc. (NDAQ) is an excellent example of what I mean; if you track the markets at all, you’ve heard of the NASDAQ and know that it is one of the biggest exchanges in the United States, but you probably didn’t know that for the company that operates that exchanges, trading and clearing are just a part of what its overall business does. One of the areas that the company has been putting a lot of recent investment and focus, for example, is on its Investment Intelligence segment, which provides market and index data and analytics for financial institutions. This is an area that operates primarily as a subscription-based service, which provides a high-margin stable operating base as well as some of the company’s best long-term growth opportunities. Another growth area is in the company’s fraud and anti-money laundering solutions, which NDAQ strengthened by acquiring Verafin, a leading anti financial crime technology provider, in early 2021. That business is currently seeing the most success with small banks, with the potential for drawing larger banking customers providing a nice long-term growth opportunity.

The company’s fundamental strengths include healthy free cash flow and operating margins. Those strengths appear to have given the company a useful headwind that allowed it to diverge from the broad market through the second half of 2022, rising from a yearly low at around $46.50 to its 52-week high at around $69 per share.  The stock has dropped back since then, and is now sitting at around $59 per share. Are those strengths, combined with the latest dip in price, enough to make the stock a useful value at its current price? Let’s find out.

Fundamental and Value Profile

Nasdaq, Inc. is a global technology company. The Company manages, operates, and provides its products and services in four business segments, including Market Technology, Investment Intelligence, Corporate Platforms, and Market Services. Its Market Technology segment is a global technology solutions provider and partner to exchanges, clearing organizations, central securities depositories, regulators, banks, brokers, buy-side firms, and corporate businesses. The Investment Intelligence segment includes its market data, index, and analytics businesses. The Corporate Platforms segment includes its listing services, and investor relations and environmental, social and governance (IR & ESG) services businesses. The Market Services segment includes its equity derivative trading and clearing, cash equity trading, fixed income and commodities trading and clearing (FICC) and trade management services businesses. It provides broker services, clearing, settlement and central depository services. NDAQ’s market cap is about $28.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings growth was flat, but negative, at 0.52%, while sales increased by about 7.85%. In the last quarter, earnings shrank by -5.88%, while sales posted a modest increase of 1.61%. The company’s margin profile is healthy, but showing some signs of weakness; over the last twelve months, Net Income was 18.09%, and 15.23% in the most recent quarter.

Free Cash Flow: NDAQ’s free cash flow was a little over $1.4 billion over the past twelve months and translates to a modest Free Cash Flow Yield of 4.91%. It should be noted that Free Cash Flow was roughly equal to the previous quarter, but nicely above the $920 million mark of a year ago.

Dividend Yield: NDAQ’s dividend is $.80 per share, and translates to a yield of 1.35% at its current price.

Debt to Equity: NDAQ has a debt/equity ratio of 0.77. This is a conservative number that I think is a little misleading. Their balance sheet shows about $705 million in cash and liquid assets. That is an improvement from $352 million in the previous quarter, but a little below the $742 million mark of a year ago. The company also reported a little over $4.7 billion in long-term debt. The company’s operating margins and free cash flow indicate debt service isn’t a problem, however the last quarter’s decline in Net Income is a red flag that bears watching for signs of improvement in the quarters ahead.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $59.50 per share. That suggests that the stock is fairly valued right now, with about 1% upside from its current price, and with a useful discount price at around $47.50.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last  year. The diagonal red line traces the stock’s upward trend from from its low point in May of last year at around $46.50 to its December peak at around $69. It also acts as the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has faded back strongly since then, with the stock extending the slide into a short-term downward trend this month as the stock is approaching expected, current support in the $58 range based on the 50% retracement line. Immediate resistance is at about $60.50, where the 38.2% retracement line sits. A push above $60.50 should have near-term upside to about $64 before finding next resistance, while a drop below $58 should find next support at around $55 where the 61.8% retracement line sits.

Near-term Keys: NDAQ has some useful fundamental strengths, but also shows a couple of things that are worth paying attention to in the quarters ahead, such as its declining Net Income, for improvement before considering a long-term investment more seriously. The stock’s current price also doesn’t represent a useful value right now, which means that the best probabilities to work with this stock lie in short-term trading opportunities. A push above $60.50 would be a useful signal to consider buying the stock or working with call options, with $64 offering a useful bullish profit target. You could also use a drop below $58 as a signal to think about shorting the stock or buying put options, with $55 acting as a practical profit target on a bearish trade.

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