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Stock Analyst Update

Nasdaq Boosts Growth Profile With Software Acquisition

Nasdaq recently announced the acquisition of Verafin, an anti-financial crime solutions provider, which will speed up its shift to more software-as-a-service revenue.

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Narrow-moat Nasdaq (NDAQ)  is enhancing its growth profile and speeding up its shift to more software-as-a-service (SaaS) revenue with its recently announced acquisition of Verafin, an anti-financial crime solutions provider, for $2.75 billion. Nasdaq is paying a decent price for this fast-growing company. On a pro forma basis, Verafin would have increased Nasdaq’s market technology and investment intelligence segments’ revenue contribution in the third quarter to 47% of total revenue from 45%, which implies that Verafin’s quarterly revenue is probably in the range of $15 million to $30 million, which is relatively small compared with Nasdaq’s third-quarter net revenue of $715 million. That said, over the past three years, Verafin has grown revenue at around a 30% compound annual growth rate, and Nasdaq expects Verafin’s 2021 annual revenue to be in excess of $140 million. We don’t anticipate making a material change to our $95 fair value estimate for Nasdaq.

Nasdaq is expecting some synergy with Verafin. Currently Verafin primarily serves smaller banks with money laundering and fraud in North America. Nasdaq already has trade surveillance services and relationships with large banks and international banks. Nasdaq may be able to use its existing relationships to offer Verafin’s services to a wider customer base while building a more comprehensive suite of compliance services.

The acquisition will be partially funded by debt, and Nasdaq expects its debt/EBITDA ratio to increase to 3.9 times, compared with 2.6 times in 2019. The company plans to bring down its financial leverage over time, but this means it will also likely reduce its share repurchase activity.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.