Nasdaq Earnings: Revenue Growth Recovers as More Favorable Market Valuations Support Index Revenue

Narrow-moat-rated Nasdaq NDAQ reported solid third-quarter earnings as strong antifinancial crime and index revenue growth was partially offset by a decrease in trading revenue. Net revenue increased 5.6% from last year and 1.6% from last quarter to $940 million. Meanwhile, a higher effective tax rate and an increase in nonoperating costs left earnings per share flat at $0.60. As we incorporate these results, we do not plan to materially alter our $55 per share fair value estimate and see the shares as fairly valued at current prices.

As we expected, Nasdaq’s index results continued to improve in the third quarter as the segment benefited from higher market valuations. Revenue increased 15.2% from last year and 11.6% from last quarter to $144 million. Nasdaq receives most of its index revenue from fees based on the amount of assets linked to its indexes, creating a direct link between the market and the segment’s results. Moreover, due to the success of its Nasdaq 100 index, the business is particularly sensitive to the volatile technology sector. While the index segment has delivered several quarters of double-digit quarter-over-quarter growth, this was largely driven by market forces, and we expect sequential growth to decelerate going forward.

Nasdaq’s antifinancial crime segment continues to be a bright spot for the company, with revenue increasing 20.8% from last year to $93 million. This growth was driven by particularly strong results in its antifraud business, Verafin, which grew 29%. The high $2.75 billion price tag Nasdaq paid for Verafin in 2021 initially raised concerns, but the company has consistently managed to deliver impressive results from the asset. With Verafin’s client base beginning to expand to Tier 1 and Tier 2 banking clients, there is a strong growth runway for the business. This track record lends more confidence to Nasdaq’s plan to acquire Adenza, though we still see the potential for material execution risk from the deal given its size.