Nasdaq OMX (NDAQ) is expected to report earnings for the fourth quarter of 2012 on Thursday, January 31. The company’s earnings through the first nine months of the year were adversely affected by a slump in trading activity as the average daily share volume in the U.S. fell by 18%, leading to a 9% decline in revenues. With tepid trading activity continuing through the fourth quarter, maintaining performance in non-transaction based businesses like market data and access and broker services will be important for Nasdaq.
Our price estimate of $29 for Nasdaq OMX’s stock is at a premium of 10% to the current market price.
Market Not Recovering
U.S. cash equity trading accounts for nearly half of Nasdaq’s revenue. The company earns around $0.40 per thousand matched shares. Although its market share has remained around 30%, the latest monthly volume report reveals that the U.S. matched equity volume dropped 37% from May through December, with the December volume being 21% below the 2011 level for the same month. This decline in trading activity will likely affect the fourth quarter income, but we expect a gradual recovery in the next few years as macro-economic conditions become more conducive for trading.
Market data is one of the important business divisions for Nasdaq, accounting for a fifth of its EBITDA. The company provides quote and trade information to news channels and institutional clients like trading firms. Nasdaq acquired RapidData to deliver government and economic news to its clients via an electronic feed at the end of 2011, and this helped boost revenues by 13% in the first nine months of 2012. The company started 2012 with 19,000 subscriptions to its data feed, and has since managed to increase the number many-fold, and is on track to cross 90,000 by the end of the calendar year.
Listing Affected By Facebook?
The Facebook (FB) IPO fiasco seems to have had little effect on Nasdaq’s reputation as the preferred destination for technology companies in the U.S. Around 70% of all technology companies in the country are currently listed on Nasdaq. More than half of the 109 companies that went public in the first nine months of 2012 preferred Nasdaq over NYSE (NYX). The exchange hosted 17 IPOs in the third quarter, including that of travel search engine Kayak (KYAK).
Disclosure: No positions.