Nasdaq

Nasdaq reported another strong set of earnings, as the firm benefited from both positive market conditions and better-than-expected solutions revenue. Net revenue increased 15% from last year to $1.5 billion, while diluted earnings per share increased to $0.90 from $0.79.

Why it matters: While the market's reaction to the earnings release has been modest, Nasdaq's second quarter results were better than we had anticipated, as the firm's index and capital markets technology revenue came in above our expectations. We had high expectations for index revenue, as the firm benefits from higher market valuations. But the 35% increase to $271 million was better than we had anticipated, thanks to $51 billion in net inflow during the quarter. While Nasdaq will likely remain reliant on its crown jewel Nasdaq 100 index, the firm's efforts to diversify its index business are bearing fruit. Nasdaq's capital markets technology business also enjoyed strong growth, with revenue increasing 15% to $321 million, above the firm's medium-term guidance of high single to low double digits. We do expect revenue growth to decelerate in 2027 and beyond, but this is another sign that the Adenza acquisition is paying off.

The bottom line: We are increasing our fair value estimate for narrow-moat-rated Nasdaq to $84 from $82. Despite the increase, we still see Nasdaq as modestly overvalued at the current price and think the firm's strengths are already priced into the shares. The increase in our fair value estimate comes from higher revenue growth projections, mostly driven by higher index and financial technology revenue growth. We now expect firmwide net revenue to increase at an 8.3% CAGR over the next five years, up from 6.9% previously. These positive adjustments were offset by an increase in our weighted cost of capital from 7.1% to 8% as we adjust our cost of capital assumptions across our coverage.

While somewhat overshadowed by Nasdaq's larger and more strategically important businesses, the firm's data and listing segment is seeing an acceleration in growth, with revenue rising 9.6% to $217 million. Nasdaq's listing business has long benefited from having its brand closely tied to the technology industry and disruptive companies, giving it an advantage over the New York Stock Exchange when it comes to drawing in new listing. This has allowed the firm to reliably win anywhere from 70% to 80% of new IPO volume. However, with the lack of new IPO volume in recent years this advantage has added little value to the company as the number of publicly listed companies both at Nasdaq and industry wide trailed lower. This lull in issuance has come to a sharp end in 2026, with deal volume accelerating dramatically, benefiting Nasdaq's listing business more than its rival's. As long as IPO conditions remain favorable we expect Nasdaq's data and listing segment to outperform the firm's medium-term outlook for low to mid-single-digit growth.

Nasdaq did see meaningful expense growth during the quarter, with adjusted operating expenses rising 10% to $641 million. Along with earnings, Nasdaq also increased its 2026 non-GAAP operating expense guidance again to between $2.53 billion to $2.57 billion, up from a range of $2.485 billion to $2.545 billion. We are fine with the higher-than-expected expense growth as Nasdaq is investing for growth and the firm clearly has more opportunities to chase than initially expected. Moreover, even with the faster increase in costs, the firm's operating margin still expanded to 47% from 44% last year thanks to strong revenue growth. We expect Nasdaq to continue to invest aggressively in its business and our projections see only limited EBITDA expansion beyond what the firm has already delivered in the first half of 2026. That said, the firm's net income margin should improve significantly over time as its amortization expense from the Adenza acquisition rolls off, and we expect net income to increase at a 11.3% CAGR over the next five years.

Our fair value estimate is $84 per share, equivalent to 23.7 times our projected 2026 earnings. We expect Nasdaq's overall financial technology division to have a 12.7% CAGR from 2025-29, slightly above the midpoint of the firm's 10%-14% medium-term outlook.

We expect Nasdaq’s revenue to grow at an average rate of around 8.3% over the next five years, with most of this growth coming from the software businesses. Nasdaq’s exchange business has benefited from increased retail interest in equity markets, which drove substantially higher trading volume in 2020 and beyond. However, competition among equity exchanges remains intense, and as new competitors have entered the market, Nasdaq has had to choose between losing market share or losing pricing power. Additionally, off-exchange trading platforms remain a major competitive force in the equity trading business, with the exchange industry steadily losing share. While recent results in the exchange business have been excellent, we expect normalization once market conditions stabilize.

We also expect increased regulatory and counterparty pushback to limit the firm's ability to increase equity market data revenue growth through higher pricing for the foreseeable future. With the SEC's recent efforts to reform market data practices in the US, there is also a risk that the firm's data revenue could decline due to regulatory action. This is not a part of our base case, as the SEC's push to reform market data has largely stalled and is not likely to regain momentum under the current administration.

As revenue growth in Nasdaq’s market platform segment stagnates, we expect most of the company’s growth to come from the corporate access and financial technology segments, which are now the focal point of the company’s growth strategy.

Nasdaq's index business should remain a major success story for the firm. Futures tied to its Nasdaq-100 index have become a major equity index futures product, driving substantial transactional revenue for the firm and helping offset lower AUM-based fees. Market valuations have recovered from their lows, particularly for the technology stocks that make up the backbone of the Nasdaq-100, creating favorable conditions for Nasdaq's index business, though we expect growth to slow in 2027.

Nasdaq has built an impressive competitive advantage in the listing space by utilizing its index and corporate services businesses to create tangible reasons for new IPOs to list with Nasdaq over the NYSE. This has led Nasdaq to consistently win around 70% of new IPOs. We expect Nasdaq to retain its advantage in new company listings over its peer, the New York Stock Exchange, which should drive low- to mid-single-digit revenue growth for its listings business in the long-term, though near-term performance should be better than this as IPO activity is at a cyclical high.

We expect the company’s market technology, index, and data revenue to benefit from operating leverage as they continue to grow. We project that Nasdaq’s operating margin will expand over time, supported by improving margins in its market technology segment as well as Adenza's already lean cost structure, reaching 52.6% by the end of 2030.

We think Nasdaq has a narrow economic moat that will allow it to continue to earn returns on invested capital above its cost of capital. The moat is defended primarily by valuable intangible assets, as Nasdaq has created substantial recurring revenue sources through the value of its data offerings as well as the strength of the Nasdaq brand. The company’s success in monetizing its valuable intangible assets comes in a variety of diversified business lines, such as licensing its indexes to futures contracts or offering market data from its equity and options exchanges. Outside of its exchanges and their associated revenue streams, Nasdaq has a broad slate of product offerings in capital market software, risk management, and regulatory technology through the acquisition of Adenza. This allows it to fulfill multiple product needs as a single provider and further reorients the company toward being a financial data and software provider over its legacy exchange business.

Unlike other exchanges we cover, we do not think Nasdaq’s cash equity and options exchanges provide the firm with meaningful network effects. Unlike the futures offered by some of Nasdaq’s competitors, cash equity and options can be sold at a different exchange than the one they were purchased at. Additionally, alternative trading systems like dark pools provide additional tools for large investors to lower implicit trading costs without the help of Nasdaq or the other exchanges. The result of this is that trading volume at equity exchanges is price-sensitive, and major exchanges offer substantial rebates in order to attract volume. Competition among exchanges for volume keeps fees down. and the equity exchange industry as a whole has steadily lost market share to alternative trading systems over time.

Despite weak pricing power among equity exchanges, new competitors have still intruded on both the cash equity and options sides of Nasdaq’s business, as it is not especially difficult to enter the market, and Nasdaq’s major counterparties have historically encouraged further competition in the exchange industry. IEX launched its equity exchange in 2016, MEMX was launched in 2020, and the Texas Stock Exchange opened its doors in 2026. In the options industry, Nasdaq has had to deal with the success of MIAX, which has grown to roughly 14% of total volume since its debut in 2012.

Were we to evaluate Nasdaq’s equity and derivative trading business as a stand-alone company, we would likely give it a no-moat rating based on these competitive dynamics. However, Nasdaq can generate associated revenue from its trading business through the use of its intangible assets to sell data, listing services, and licenses for its indexes. While Nasdaq participates in the common tape system, it can sell a more complete dataset to investors, including a full view of its order book and historical prices. Because of the size of Nasdaq’s market share, this data is necessary for traders to have a complete view of the market. Additionally, as trading has become automated, the speed at which an investment firm receives its data has become critical, making rapid access to exchange data a business necessity for some trading firms. Nasdaq generates significant revenue by selling connectivity services.

Nasdaq also benefits from the strength of its brand. New companies are encouraged to be listed on Nasdaq to prove their legitimacy, and existing firms have incentives to list with Nasdaq since it makes them eligible for Nasdaq’s family of indexes. Nasdaq has also historically been known to be favored by technology and disruptive companies, creating a more growth-oriented brand name that many firms want to attach to their shares. As a result, Nasdaq has consistently won the majority of new IPO listings. Once listed on Nasdaq’s exchange, companies face switching costs, as leaving renders them ineligible for Nasdaq’s indexes, reducing demand for their shares. Changing listing locations also requires going through the initial listing process again at a different exchange, and being listed by either the NYSE or Nasdaq can often be ingrained in a company’s legal structure. While these hurdles are relatively modest, listing fees are generally quite low, ranging anywhere from $50,000 to $200,000, meaning that even a minor inconvenience is likely not worth the effort to a company.

The same brand intangible asset drives Nasdaq’s index business as well. Nasdaq operates a family of indexes, with the most well-known being the Nasdaq-100. Nasdaq has been able to use this broad recognition to license its indexes to investment providers for the creation of exchange-traded products based on its indexes. Nasdaq then charges the investment providers a percentage of assets under management as a recurring fee to use its brand name on their products. Dropping the license with Nasdaq would require an investment provider to migrate existing investors from the Nasdaq-branded products, placing their AUM at risk in the process. In a similar vein, there is no guarantee that traders using derivatives tied to the Nasdaq index will migrate to another equity-linked product at the same firm if the license is not renewed. As a result, we see Nasdaq’s index business as being relatively captive once it has been built.

Cash equity and equity option execution can be seen as a loss leader that enables Nasdaq’s profitable data- and service-driven revenue streams to persist and grow. These revenue streams also make it more difficult for new exchange competitors to take significant market share since they will be forced to compete on price against Nasdaq without these alternative revenue sources. As a result, we believe that Nasdaq has created a narrow moat around its business that will allow it to earn returns above its cost of capital.

Nasdaq's capital markets technology business has recently outperformed expectations. If cross-selling opportunities with Nasdaq's other businesses prove stronger than expected, then financial technology growth could be better than projected.

If technology stocks continue to outperform the broader market, we expect Nasdaq's index business to continue to enjoy impressive growth.

The company’s listing business has outperformed its primary rival in recent years, winning the majority of newly listed securities. If IPO activity increases, we expect Nasdaq to benefit.

Nasdaq continues to face growing competitive pressure at its exchanges, with two new competitors launching in 2020 and another in 2026. This could lead to falling market share in its exchange business.

Nasdaq has seen considerable industry and regulatory pushback on the pricing of its market data products; this could limit its ability to grow revenue through price increases.

The Adenza acquisition was not cheap. At 18 times expected 2023 revenue, Nasdaq paid a significant premium, creating risk for shareholders if growth slows.