Nasdaq Inc (NDAQ, Financial) recently recorded a daily gain of 2.58% and a 3-month loss of 9.03%. With an Earnings Per Share (EPS) (EPS) of 2.22, the question arises: is the stock fairly valued? This article aims to answer this question by providing an in-depth analysis of Nasdaq's valuation. We invite you to delve into the following analysis for a deeper understanding.
Company Introduction
Founded in 1971, Nasdaq is renowned for its equity exchange. Apart from its market-services business, which constitutes about 35% of sales, the company also sells and distributes market data. It offers Nasdaq-branded indexes to asset managers and investors through its information-services segment, which makes up 30% of its sales. Nasdaq's corporate-services business, accounting for 20% of sales, provides listing services and related investor relations products to publicly traded companies. Through Nasdaq's market technology group, which constitutes 15% of sales, the company facilitates the exchange operations of other exchanges worldwide and provides financial compliance services. With a current stock price of $52.02 per share and a market cap of $25.60 billion, Nasdaq's stock appears to be fairly valued according to our GF Value estimate.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should be traded. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line represents the fair value at which the stock should be traded. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Given that Nasdaq is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Nasdaq's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Nasdaq has a cash-to-debt ratio of 0.54, which ranks worse than 74.07% of 756 companies in the Capital Markets industry. Based on this, GuruFocus ranks Nasdaq's financial strength as 5 out of 10, suggesting a fair balance sheet.
Nasdaq's Profitability and Growth
Investing in profitable companies poses less risk, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Nasdaq has been profitable 10 times over the past 10 years. Over the past twelve months, the company had a revenue of $6.10 billion and Earnings Per Share (EPS) of $2.22. Its operating margin is 27.68%, which ranks better than 68.44% of 640 companies in the Capital Markets industry. Overall, GuruFocus ranks the profitability of Nasdaq at 8 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Nasdaq is13.7%, which ranks better than 62.5% of 680 companies in the Capital Markets industry. The 3-year average EBITDA growth is 12.1%, which ranks worse than 51.4% of 465 companies in the Capital Markets industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Nasdaq's return on invested capital is 6.08, and its cost of capital is 8.26.
Conclusion
Overall, Nasdaq (NDAQ, Financial) stock is estimated to be fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 51.4% of 465 companies in the Capital Markets industry. To learn more about Nasdaq stock, you can check out its 30-Year Financials here.
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