Insights

1 Under-the-Radar Growth Stock to Buy and Hold

When you think of Nasdaq (NASDAQ: NDAQ), you probably think of the exchange or its indices, which are the leading benchmarks for technology and growth stocks. However, Nasdaq Inc. is also a company that itself trades on the Nasdaq Stock Exchange. And while the exchange is a household name for investors, Nasdaq’s stock largely flies under the radar compared to other tech stocks.

The stock is, in fact, beating the exchange it owns, trading down about 14% year-to-date, while the Nasdaq Composite is off 20% as of Aug. 1. Here is why Nasdaq, the stock, stands out on Nasdaq, the exchange.

A 3-for-1 stock split to take effect this month

Nasdaq is currently trading at about $180 per share, but that will soon change as the company has been approved for a 3-for-1 stock split. That means that every shareholder as of Aug. 12 will get two additional shares for each already owned, but each share will be worth about $60. The split will take place after the markets close Aug. 26 and start trading on Aug. 29.

As Nasdaq President and CEO Adena Friedman explained on the first-quarter earnings conference call, the split invites more investors to own shares because the entry price is lower, and it creates greater liquidity and more trading on the exchange “as opposed to through these fractional share offerings are all off-exchange.” And because Nasdaq earns revenue when shares are traded in the U.S., stock splits are good for the company, because they generally encourage more trading.

The market has reacted positively to the news as the stock is up roughly 12.2% since the second-quarter earnings report came out on July 20, along with the announcement of the final approvals and dates for the stock split. In the month of July, Nasdaq was a market mover, up 18.6%.

Nasdaq has diverse revenue streams

News of the stock split aside, Nasdaq posted solid earnings in the second quarter. Overall, total revenue was up 10% year over year to $1.5 billion while net revenue was up about 6% to $893 million. Non-GAAP (generally accepted accounting principles) earnings per share was up 9% year over year to $2.07 — not counting a net gain on a divestiture a year ago.

While the exchange business is a major revenue generator, what makes Nasdaq an attractive stock is it has four different revenue streams — with multiple different types of revenue. And all four business segments saw year-over-year revenue increases in the most recent quarter.

The four segments are:

Market services, which include revenue from trading on the exchanges;
Investment intelligence, which includes market data and intelligence, as well as licensing its indices;
Market technology, which offers technology solutions for institutional investors in the areas of trading and settlement, anti-financial crime, among others; and
Corporate platforms, which include index listing, as well as investor relations and ESG (environmental, social, governance) services.

Nasdaq earns revenue from transaction fees related to trading within the exchanges as well as listing fees for being on the indices. This is recurring revenue and it helps stabilize the bottom line. Another recurring revenue source is subscriptions within its software-as-a-service (SaaS) offerings in its market technology business. On the second-quarter earnings call, Friedman said SaaS revenue grew 12% year over year to $679 million in the second quarter and now makes up 35% of recurring revenue. “The consistent growth we’re seeing in our recurring revenue segments provides a powerful starting point for our overall performance,” she said.

Nasdaq has focused on building out its SaaS and recurring cash flow through these various business segments to not only create more growth opportunities but also to navigate a variety of market cycles — including bear markets. The growth in these segments has also allowed Nasdaq to improve its operating margin to its highest level since 2016 at 26% and boost its quarterly free cash flow to $570 million in the first quarter — the highest ever.

With these growth engines, its capital strength, its dominance among index providers, and its soon-to-be lower entry price, Nasdaq looks like a solid long-term buy right now.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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