Analyst Insights

Citi Evaluates Nasdaq's SaaS Transition: Maintains Neutral Rating

Citi revises Nasdaq's price target to $63, reflecting mixed business segment outlook and macroeconomic uncertainties

By Harrison Wall

7/10, 10:15 EDT
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KEY FIGURES

Stock Rating: Neutral
Revised Price Target: $63.00
Previous Price Target: Not provided
Stock Price (July 9, 2024): $60.81

Summary Points

  • Nasdaq's shift to recurring revenue/SaaS model shows promise, but current valuation at $63 target price reflects mixed outlook across business segments.

  • Citi maintains Neutral rating on Nasdaq, citing pressures in index, listings, and trading, offset by positive outlook for market technology and corporate solutions.

  • Nasdaq's future performance hinges on macro factors, with potential upside from robust trading environment and downside risks from weak demand and regulatory changes.

Mixed Outlook Amidst Business Model Shift

Citi's latest equity research report on Nasdaq, Inc. (NDAQ.O) focuses on updating estimates in light of recent market dynamics and the company's ongoing strategic shift towards a more recurring revenue/Software-as-a-Service (SaaS) model. The report highlights a mixed outlook for Nasdaq, with pressures anticipated in the index and listings business, as well as trading, given the company's focus on equities and equity options. However, there is a more positive sentiment towards Nasdaq's market technology and corporate solutions segments. The report underscores that the current valuation of Nasdaq is not compelling, as the stock is trading near its historical averages.

Neutral Rating and $63 Price Target

Citi has maintained a Neutral (2) rating on Nasdaq, with a revised price target of $63. This target is based on a 21x multiple of the 2025 EPS estimate, aligning with Nasdaq's 5-year average rolling price-to-earnings (PE) ratio of 20x. The investment thesis hinges on the mixed outlook, with certain segments expected to perform better than others. The report notes, "We do not see the current valuation as compelling as the stock is trading near historical averages," reflecting a cautious stance on the stock's near-term potential.

Pressures and Opportunities in Business Segments

The driving factors behind the updated price target and stock rating include anticipated pressures in Nasdaq's index and listings business, as well as trading activities. These segments are expected to face challenges due to the company's heavy focus on equities and equity options. Conversely, the market technology and corporate solutions segments are viewed more favorably. The report highlights that these areas could benefit from greater acceleration and penetration of Tier 1 banks in the Market Technology business. Citi's analyst states, "We expect to see pressure in the index and listings business, as well as trading given the focus on equities and equity options. However, we do have a more positive outlook on market technology and corporate solutions."

Macro Influences and Model Adjustments

Macro influences such as the overall trading environment and regulatory changes play a significant role in Nasdaq's valuation and price target. A more robust trading environment and a better-than-expected macro backdrop could benefit Nasdaq's listings and index businesses. Conversely, weaker-than-expected demand and adverse regulatory changes could pose risks. The report also acknowledges the potential for increased competition to impact Nasdaq's performance. Major model adjustments include a focus on the recurring revenue/SaaS model, which is expected to provide more stable and predictable revenue streams in the long term.

Valuation Recap and Future Outlook

Citi's valuation of Nasdaq at $63 per share is based on a 21x multiple of the 2025 EPS estimate, reflecting the company's 5-year average rolling PE ratio of 20x. This valuation takes into account the mixed outlook for different business segments and the strategic shift towards a recurring revenue model. Key risks to this valuation include weaker-than-expected demand, regulatory changes, and increased competition. On the upside, a more robust trading environment and better macroeconomic conditions could drive the stock price higher. The report concludes with a cautious yet optimistic view, stating, "Factors that could cause the company to exceed our target price include more robust trading environment, better-than-expected macro backdrop which could benefit listings and index businesses, and greater acceleration and penetration of Tier 1 banks in the Market Technology business."