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WIKI ANALYSIS
The NASDAQ OMX Group (NASDAQ:NDAQ) is a U.S. based financial services company which is best known for being the owner of the NASDAQ stock market. It is currently the largest and most actively traded electronic stock market in the U.S. with a daily share trading volume of over 2 billion for 3,200 listed companies. The company faces challenges in the decline in new listings of traditional equities (i.e., company stocks), which is compounded by fierce competition from NYSE Euronext (NYX) in the mature U.S. equities market. Nasdaq currently makes about two-thirds of its revenue from the listing and transacting of equities. As such, the company is very dependent on the overall health of the U.S. economy, in particular the information technology and financial services sectors.
The company is poised to leverage new opportunities in the increase of derivative finance instruments, as evidenced by its acquisition of the Philadelphia Stock Exchange—the third biggest derivatives player—in November 2007. In addition, the company is staking much of its growth potential on its ability to continue expanding outside the mature U.S. markets, as key international markets are growing at a much faster rate [1].
Company Overview
Over the past three years, revenue has more than tripled while net income has risen over 10x from $11 million to $127 million.
- Securities Listings (Corporate Client Group): Companies who wish to be traded on the NASDAQ index must pay a registration fee as well as an annual fee.
- Trading Transaction Fees: Each trade carries a small transaction fee. The fee varies with the transaction initiator, but is usually a fraction of a cent.
- Information Products and Services (Market Data): Nasdaq provides market data on the companies listed on its index. It also sells exchange-traded funds based on the companies in its index.
As the pie chart shows, 89% of its net revenue for the first half of 2007 came from its three core products and services.
Growth opportunities in Information Products and Services
While market data product and services accounted for 25% of revenue in the first half of 2007, the company is increasingly focusing on offering data services, such as the sale of proprietary trading data to companies listed in its exchange, to grow its business. Traditionally, exchanges have made money by listing companies, collecting a small charge on each transaction, and providing market data. As data becomes widely available, Nasdaq is beginning to offer company-specific data on trends and other relevant information to companies listed on its exchange.
Trends and Forces
- Increase in derivative instruments: In order to better compete with the Chicago Mercantile Exchange, the Nasdaq offers trading products such as options and futures, which are collectively known as derivative instruments. Nasdaq has agreed to purchase the Philadelphia Stock Exchange in November 2007 for $625 million. That exchange currently ranks third in the options market. Hedge funds drive a significant demand for these types of products.
- Threat from private equity markets: Investment banks and other financial institutions are creating their own private-label equity markets to trade privately owned companies; for example, Goldman Sachs Group (GS) has an offering called Tradeable Unregistered Equity (TRuE). An increase in such a trend could severely hurt Nasdaq's business for public stock offerings (unless the company decides to expand into this are as well). As seen in the table below, the number of IPOs, secondary offerings, and total listings have all decreased from 2004 to 2006.
| Key Business Drivers[2] | 2004 | 2005 | 2006 |
| Initial public offerings | 148 | 126 | 137 |
| Secondary offerings | 233 | 222 | 214 |
| New listings | 260 | 269 | 285 |
| Number of listed companies | 3,271 | 3,208 | 3,193 |
- Key Exposure to Finance and Technology Industries: Nasdaq is heavily dependent on the financial services and information technology industries. In the short term, negative forces such as the subprime lending crisis may drive transactions revenue for financial services as investors shed their holdings, in the longer term, fundamental economic downturns in either or both industries could negatively affect the company's listings and transactions business.
- International presence via global exchange consolidation: The American stock exchange market is highly competitive, while many international markets are much less developed. After its failed attempt to purchase the London Stock Exchange, the Nasdaq Stock Market bought OMX and sold 20% of itself to Borse Dubai[3]. This comes at a time when its main competitor, the then-New York Stock Exchange merged with Euronext to form NYSE Euronext (NYX). This establishes a trend of major exchanges forming international alliances to increase the number of companies that they list as well as diversify the list of products and services that they offer to their customers. As the rate of increase in new company listings in United States stock markets slow down due to unfavorable corporate regulations (such as the Sarbanes-Oxley Act) in favor of international markets, creating partnerships with international firms is essential to future growth.
Competitors
Both NYSE Euronext (NYX) and the Nasdaq are engaged in competition to expand their presence overseas as new listings in its core US market decrease. In addition, Nasdaq faces fierce competition from the Chicago Mercantile Exchange Holdings (CME) as Nasdaq expands into its traditional market of options and futures.
| Exchange | 2004 Net Inc. ($m) | 2005 Net Inc. ($m) | Percent Change | 2006 Net Inc. ($m) | Percent Change |
| NDAQ | 11.36 | 61.69 | 443% | 127.89 | 105.9% |
| NYX | 30.16 | 40.75 | 35.1% | 204.98 | 403% |
| CME | 102.60 | 130.03 | 26.7% | 125.88 | (3.2%) |
References
- ↑ NDAQ FY 2006 SEC Filing Item 1A: Risks
- ↑ NDAQ FY2006 10-K, "Nasdaq’s Operating Results", p. 45
- ↑ Nasdaq Investor Relations Global Financial Marketplace
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