Despite a 77% rise since the March 23 lows of this year, at the current price of around $125 per share we believe NASDAQ Inc. stock (NASDAQ: NDAQ) looks fully valued based on its historic P/E multiples. NASDAQ, a global financial exchange group, has seen its stock rally from $73 to $129 off the recent bottom compared to the S&P which moved around 50%. Its stock is beating the broader markets as the company has benefited from market volatility due to the Covid-19 crisis, leading to higher trading activity. Notably, its revenues grew by 12% y-o-y in Q2 2020, mainly driven by higher U.S. industry trading volumes. Further, its stock is trading near its all-time high – 22% above the levels seen in late 2019. 

NASDAQ’s stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, trading activity is likely to normalize over the coming months. 

Some of this rise of the last 2 years is justified by the roughly 8% growth seen in NASDAQ’s revenues from 2017 to 2019, which translated into similar growth in Net Income.

While the company has had sluggish revenue and earnings growth over recent years, its P/E multiple has seen a significant increase. We believe the stock is unlikely to see an upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Why NASDAQ Stock moved 76% between 2017 and now has the underlying numbers.

NASDAQ’s P/E multiple changed from around 17x in 2017 to about 23x in 2019. While the company’s P/E is just below 28x now, there is a downside when the current P/E is compared to levels seen in the past years – P/E of close to 23x at the end of 2019 and around 17x as recent as late 2017.

So what’s the likely trigger and timing for the downside?

NASDAQ Inc. is a holding company that engages in trading, clearing, exchange technology, regulatory, securities listing, information, and public & private company services. Market Services is its main contributing segment – which includes Cash Equity Trading, FICC (Fixed Income, Currency and Commodity) trading, Equity Derivative Trading and Clearing, and Trade Management Services, with a total revenue share of more than 62% over the recent years. The segment generates revenue in terms of clearing and transaction fees which are charged on per transaction basis. Due to the ongoing coronavirus pandemic and economic uncertainty, securities markets are witnessing high trading activity, leading to higher revenue for the company. However, as the lockdown restrictions are eased around the world, the economic condition is likely to see some improvement in the third quarter. it is also validated from the recently released U.S consumer spending data which indicates a m-o-m growth of 8.5% in May followed by 5.6% in June and 1.9% in July. This, in turn, is likely to reduce the higher market volatility and normalize the trading volumes, leading to a drop in NASDAQ’s revenue growth rate on a sequential basis.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.  

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.