AI Integration Will Drive Cost Efficiencies And Client Expansion In Financial Technology

Key Takeaways

• Successful acquisition integrations and AI innovation drive cost efficiencies, improved margins, and expanded client offerings, enhancing Nasdaq's growth potential.
  
• Leveraging cross-sell opportunities in the Financial Technology division can boost revenue through existing client relationships and diverse product adoption.
  
• Decline in listings revenue and macroeconomic risks could impact future growth, while expense management and access fee reduction pose profitability challenges.

Catalysts

Operates as a technology company that serves capital markets and other industries worldwide.

• With the global macro environment trending towards a soft landing and expected future rate cuts, there is potential for sustained trading activity across Nasdaq's markets and a rebound in the global IPO environment. This could positively impact Nasdaq's future revenue growth.
  
• The successful integration of acquisitions like AxiomSL and Calypso has already resulted in significant expense synergies. As these integrations continue, further cost efficiencies could improve Nasdaq's net margins and overall earnings.
  
• Nasdaq's Financial Technology division, particularly Financial Crime Management Technology, continues to expand its client base and has strong ARR growth. This growth is driven by new client signings and upsells, which could lead to increased future revenues.
  
• Continued innovation, such as the rollout of AI-enabled tools across Nasdaq's suite of solutions and the development of new products like AI-based analytics, should enhance Nasdaq's product offerings, potentially driving revenue growth by attracting new clients and increasing client retention.
  
• Nasdaq's initiatives to leverage cross-sell opportunities across the Financial Technology division, especially with products like the Nasdaq Risk Platform, could contribute to increased revenue by capitalizing on existing client relationships and expanding service adoption.

Nasdaq Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nasdaq's revenue will decrease by -7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 32.0% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $3.19) by about December 2027, up from $959.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2027 earnings, down from 47.7x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Nasdaq Future Earnings Per Share Growth

Risks

• The decline in Listings revenue due to lower listings activity and prior year delistings could impact future revenue growth prospects, especially if the IPO market does not rebound as expected.
  
• The risks associated with the macroeconomic environment, including potential variability in global economic conditions, could impact trading activity and lead to fluctuations in revenue and net margins.
  
• Expenses increased by 5% in the quarter, which, if not carefully managed, could negatively impact net margins despite revenue growth.
  
• Variability in professional services fees, particularly in the Financial Crime Management Technology and AxiomSL segments, may lead to unforeseen fluctuations in revenue and net profitability.
  
• The significant reduction in access fees by 2/3 could lead to wider spreads in trades, which might deter lit orders and potentially reduce the volume of trades executed through Nasdaq, thus impacting revenue.

Valuation

• The analysts have a consensus price target of $83.56 for Nasdaq based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $102.0, and the most bearish reporting a price target of just $64.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.6 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of $79.61, the analyst's price target of $83.56 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.