When the stock market is setting records, that usually means good things for the stock exchanges. Nasdaq (NDAQ -2.74%) recently reported second-quarter earnings, which were driven by record trading volumes in the U.S. stock and options markets in the first half of 2021. In addition, Nasdaq's other businesses, which are less sensitive to trading, also prospered.
Image source: Getty Images.
Equity derivatives trading was the star of the show
For the second quarter, Nasdaq reported net revenue of $846 million, an increase of 21% compared to a year ago. Market services net revenue, which is based on transactions, grew 13%, while the solutions segment revenue rose 25%. Operating margins increased by 1% to 54%, which drove a 23% increase in overall earnings per share to $1.90.
Net revenue from equity derivatives trading rose 24% to $103 million, driven almost entirely by increased volumes. Net revenue from cash equity trading rose 4%, as decreased trading volume of 20% was more than offset by a 23% increase in recapture revenue. Overall trading volumes in equities, equity derivatives, fixed income and commodities increased 27% compared to a year ago.
The growth in indexing is a tailwind for the business
The investment intelligence business, which includes data, analytics, and indexes, saw a 23% increase in revenue, driven primarily by a 57% gain in indexes revenue. Assets under management in exchange-traded products linked to Nasdaq indexes rose 53% year over year to $415 billion. Operating income increased 29% as margins increased. The market technology segment saw revenue rise 39%, which was driven by the acquisition of Verafin.
Corporate platforms revenue increased 22%, as Nasdaq listed 135 initial public offerings (IPOs) of which 88 were operating companies and 47 were special purpose acquisition companies. Nasdaq led all other exchanges with a 78% win rate. In addition, it ran the offering for cryptocurrency exchange platform Coinbase Global (COIN -0.47%), which was the largest direct listing in history.
Nasdaq has been active in M&A
Nasdaq was also active in the acquisitions and dispositions front, selling its fixed-income trading operations to Tradeweb Markets. The company also made a strategic investment in Puro.earth, which is a carbon removal marketplace. Finally, Nasdaq contributed Nasdaq Private Market into a new joint venture with a consortium of big banks and Wall Street firms. Nasdaq Private Market is a system that allows private companies to conduct transactions such as tender offers, block trades, and secondary
Not cheap, but not really overvalued, either
Nasdaq is trading at 27 times expected 2021 EPS, which is toward the high end of its historical range. I wouldn't say it is expensive, but it isn't a bargain at these prices, either:
NDAQ P/E ratio data by YCharts.
Like most of its competitors, Nasdaq operates in a highly regulated industry with large barriers to entry. Creating a new exchange venue is difficult since investors will want to go where liquidity is best. This means that Nasdaq will trade at a premium multiple, especially relative to its earnings growth, which is expected to be 12% this year.
Nasdaq also pays a quarterly dividend, but the 1.2% yield is on the small side. The company did just hike its dividend 10%, however. The stock is probably a hold at these levels, but would be attractive on a pullback.
