The Nasdaq Is a Buy on Valuation and Growth Catalysts

The Nasdaq Stock Market (Nasdaq: NDAQ) is the second largest U.S. equities exchange, behind the New York Stock Exchange.

The rash of consolidation among exchanges in the past 2 years has driven their stock prices to stratospheric levels. NYSE Euronext, despite falling more than 20% in the last few months, still trades at a 51 PE and 11 P/S. The CME Group sports a 44 PE and 17 P/S, and the ICE has a stratospheric 56 PE and 29 P/S. Compare this to Nasdaq, with its relatively meager 37 PE and 2 P/S. And its not as though Nasdaq isn’t growing like the others- last week the company posted excellent second quarter numbers, boosting revenue by 16% and tripling profits.

But the company has languished compared to its high-flying peers due to its unsuccessful bid last year for the London Stock Exchange. Investors soured on Nasdaq as they watched the NYSE grab Euronext and become an international juggernaut. Despite this, NDAQ has still managed to increase its market share of U.S. stock trading at the NYSE’s expense. And the growth should continue- the SEC recently announce that it would allow companies on the NYSE to switch to the Nasdaq and keep their three-letter symbols.

The Nasdaq is lobbying to extend this ruling to include one and two-letter symbols as well. With annual listing fees on the NYSE up to 4x more than its electronic rival, I suspect some companies will be taking advantage of the opportunity to switch. The prestige long associated with being listed on the Big Board is steadily fading. As the NYSE completes its move to copy the Nasdaq and switch to an all-electronic trading platform, any differences between the two exchanges should disappear, and companies should gravitate to the lower-cost Nasdaq.

And Nasdaq is about to become an international power itself, with its pending acquisition of Nordic Exchange OMX. OMX recently reported a 53% increase in profits, and its purchase and resulting cost synergies should help drive Nasdaq’s growth and bottom line. There is still some uncertainty with what will happen with the LSE. Nasdaq owns a 30% stake in the exchange (worth over $1.5B), and is seeking to block the proposed merger between London and the Borsa Italiana. The speculation is that this may be in preparation for a second try at a takeover attempt. Regardless of what happens, Nasdaq will be the second largest international exchange and retain a major stake in another top five player.

I like NDAQ’s relative valuation, strong cash flow, and multiple growth catalysts. I’m also impressed by the current strength of the stock following earnings; it held its gains during Friday’s market sell-off. This is a good opportunity to buy into a company that looks to be on the path to becoming a global financial powerhouse.

Suggestion: Buy NDAQ around $33.80

Disclosure: SmartGuyAB is long NDAQ