The Long Case for Nasdaq Stock Market

In a recent edition of Value Investor Insight, Murray Stahl of Horizon Asset Management described why he sees unrecognized value in Nasdaq Stock Market (NDAQ).

Let’s talk about one of your financial facilitator holdings, Nasdaq [NDAQ].

MS: One of the interesting aspects of this story is that the last few years, in which Nasdaq earnings and stock price have risen dramatically, have been a period in which the growth stocks that typically trade on the exchange haven’t been much in favor. Nasdaq’s stock performance over that time has been so much better than the average stock it lists, which is a signal of the power of its business model. For the sake of argument, look at what would happen to Nasdaq if the growthgenre of company did well for an extended period of time. Lots of new companies would come public, generating higher listing fees. There’d be a lot more trading as people got more interested in the stocks. So why bother taking on the challenge of picking which of the thousands of these companies are the best investments when you can own a company, Nasdaq, that benefits from all this activity? We talked earlier about moats, but what you really want is the owner of the tollgate. Nasdaq’s customers have little alternative to paying the toll and the cost to them is fairly minimal relative to the potential benefits of listing.

Isn’t one concern that there are, in fact, increasing numbers of alternatives for listing companies?

MS: The typical financial analyst talks about market share rather than volume processed, focusing on the alleged facts that new trading platforms will lower fees and that Nasdaq and the New York Stock Exchange are engaged in a bitter competitive fight. In point of fact, lower fees and qualitative improvements like faster executions invite higher trading volumes, expanding the entire market. Irrespective of market-share shifts, there’s been no diminution in the big exchanges’ histori-cal and fairly rapid volume growth. They’ve also recently instituted fee increases. You might argue that there could be 50, 100, or 1,000 exchanges – after all, it’s only a computer anyway. The answer is quite simple: compliance. Traders, unfortunately, may not always have the highest ethical standards and regulatory supervision is very difficult over a multiplicity of exchanges. I ultimately believe the world’s going to have only two or three large exchanges. That’s partly due to control and regulation, but also because buyers and sellers seek the most liquid trading opportunities for any given transaction. As the exchanges become completely electronic – which is well on the way to being a reality – those with the largest volume will have the best economies of scale and will be able to offer the lowest prices, which will attract more trading volume. I also think modern techniques of asset allocation and risk control increasingly require all markets to be open at the same time, which argues for the creation of global, multi-national and multi-assetclass exchanges – which is what we’re starting to see happen already. I have no way of knowing exactly where Nasdaq resides in that future hierarchy, but I don’t think I need to know that to find the shares attractive.

In addition to upside from growth, is Nasdaq’s profitability where it should be?

MS: No. Nasdaq trades a much higher dollar volume than the Hong Kong Stock Exchange, for example, but has a lower capitalization because the Hong Kong exchange has higher pricing – which is based on the value of each trade rather than the share count – and because its costs are lower. The American exchanges have lower net margins than most all of the exchanges in the world and there’s no long-term reason for that to be the case. So even if volume on Nasdaq went nowhere over the next five years, I’d expect it to be much more profitable by then.

How attractive are Nasdaq shares, at a recent $43?

MS: Within five years, we think Nasdaq could be worth four times the current price, if not more.