Så ompositionerar sig Nasdaq genom förvärv för miljarder

The first thing that may come to mind when investors hear the word “Nasdaq” is the Nasdaq Composite Index, the market benchmark dominated by hot tech businesses. If Adena Friedman has her way, the company itself may be more like one of those tech names.

For that to happen, Friedman, Nasdaq’s chair and CEO, has to execute on a pair of historic acquisitions—and probably do some more convincing on Wall Street.

Nasdaq’s raison d’être is providing platforms and technology to capital markets, and increasingly, the financial services industry at large. Trading has accounted for a smaller share of total revenue in recent years as the company has moved into solutions—helping companies tackle issues ranging from sustainability to crime. That newer business area helped drive revenue growth and earnings above expectations in Nasdaq’s latest set of quarterly results.

But the strategic shift, especially a move into the high-growth area of financial crime, has come at a cost. Nasdaq handed over $2.75 billion for the acquisition of fraud detection specialist Verafin, which closed in 2021. It paid $10.5 billion—Nasdaq’s biggest-ever deal—for risk and regulatory software company Adenza. The transaction closed in November.

These are big bets that may not pan out. Adenza has “potential for material execution risk from the deal given its size,” writes Morningstar analyst Michael Miller. But the opportunity looks significant.

Financial crime is a multitrillion dollar problem, Nasdaq said in a report published last week. According to the company, $3.1 trillion in illicit funds flowed through the global financial system last year.

When you add in another $500 billion or so in fraudulent transactions and other nefarious behaviors, “you’re looking at almost a $4 trillion problem,” Friedman told Barron’s Editor in Chief David Cho in a panel discussion last week on the sidelines of the World Economic Forum in Davos, Switzerland.

“We’ve really focused on solving the massive problem of financial crime with our anti-financial crime suite, as well as managing the very complex regulatory reporting requirements that the banks have,” Friedman told Cho.

Since banks are allowed to share data with a neutral third party for the purposes of crime management, Nasdaq is able to pull data from 2,500 banks representing $6 trillion in assets. It uses artificial intelligence to help analyze transactions for crime.

“The anti-fin crime suite, and our broader reg-tech and capital markets suite of technology, is actually growing the fastest in the company,” Friedman said, noting a growth rate of 18% to 23% annually, but a lower margin profile because of investments to drive growth. Adenza, for its part, is a low-mid teens grower with a slightly better margin profile than Nasdaq overall, she added.

While the big-ticket acquisitions have raised some eyebrows on Wall Street, “the company has consistently managed to deliver impressive results from [Verafin],” at least, said Morningstar’s Miller. “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 is a popular view. Analysts surveyed by FactSet overwhelmingly rate Nasdaq stock at Buy. Not a single one rates it at Sell, and the consensus price target is almost 10% above current levels.

“Nasdaq is our top 2024 idea in the exchange space because of accelerating organic growth, deleveraging, and attractive valuation,” wrote Oppenheimer analyst Owen Lau. “We believe the improving macro backdrop will drive higher spending on anti-financial crime, higher equity markets, and improving IPO market.”

Nasdaq stock currently trades at 20 times next year’s expected earnings per share, a slight discount to a historical average of 21 times. At this valuation, “in our view, Nasdaq presents an attractive investment opportunity,” Lau said.

There may be an even more bullish view, if Friedman can be even better at selling Wall Street on Nasdaq as a technology business. The stock, at its current forward price/earnings ratio, trades closer to other traditional exchanges than high-growth tech names. If Nasdaq can convince the market that it is more fintech than exchange—and additional quarters with growth driven by anti-financial crime may do just that—the stock could fetch a valuation of more than 21 times forward earnings.