In multiple prior posts accessible through the Archives I touch upon why I like to acquire shares in great companies when they temporarily fall out of favor with the broad investment community. Nasdaq (NDAQ) is such an example.

In my June 13, 2023 post, I disclose initiating a 500 share position in a ‘Core’ account in the FFJ Portfolio @ ~$51/share on June 12, 2023. I acquired another 100 shares at ~$50.75 on July 19 and disclose this purchase in this July 20, 2023 post. With the automatic reinvestment of dividend income, I now hold 614.4797 shares. My NDAQ exposure is relatively small and is not remotely close to being a top 30 holding.

I initiated a position despite my concern about the company’s elevated leverage attributed to the Adenza acquisition from Thoma Bravo. Management, however, stressed that a capital allocation priority was to reduce leverage to 4.0x in 18 months and to 3.3x in 36 months. In my June 13, 2023 post, I reflect how NDAQ rapidly deleveraged following the Evestment acquisition in 2017 and the Verafin acquisition in 2020. NDAQ’s gross leverage ratio rose to 3.3x and 3.5x following these two acquisitions but NDAQ quickly deleveraged.

Fast forward to less than 36 months after the Adenza acquisition and NDAQ’s gross leverage ratio is 2.9x. Furthermore, the credit rating agencies have upgraded NDAQ’s domestic long-term unsecured credit ratings.

My most recent NDAQ post was published on October 24, 2025 following the release of Q3 and YTD2025 results. With the release of Q4 and FY2025 results and FY2026 guidance on January 29, this is an opportune time to revisit this existing holding.

Industry Overview

The equity exchange business is increasingly competitive and NDAQ has gradually been losing market share over the past few years. This pressure is likely to continue as the MEMX (Members Exchange) and the MIAX Pearl Equities are relatively new, technology-driven U.S. stock exchanges both launched in September 2020. They were created to compete with established venues by offering faster, lower-cost trading.

  • MEMX (Members Exchange) is designed for efficiency and backed by major financial firms. This exchange expanded into options in 2023.
  • MIAX Pearl Equities is part of Miami International Holdings, focusing on high-speed, automated trading.

Both exchanges are contributing to increased competition and fragmentation in U.S. equity trading.

In addition to these 2 new exchanges, the Texas Stock Exchange plans to launch in 2026.

Business Overview

The best way to learn about NDAQ is to review its website. Part 1 Items 1 (Business) and 1A (Risk Factors) in the FY2024 Form 10-K are also a great sources of information.

NDAQ’s market services business comprises transaction-based services, clearing, settlement, and depository services across North American and European markets. It operates multiple exchanges for trading cash equities, derivatives, fixed income, commodities, structured products, and ETFs.

Volatile markets have led to strong industry-wide trading volume with option exchanges performing particularly well. The increased prevalence of $0 commission trading platforms and a shift toward higher option volume bodes well for NDAQ’s exchange business.

Given the increasingly competitive nature of the exchange industry, however, NDAQ has gradually been transitioning away from its exchange business to become a diversified technology company. NDAQ is pursuing opportunities with large and growing total addressable markets (ie. antifraud services and financial compliance). Management anticipates its solutions business will grow ~8% – ~11% organically over the next ~3 – ~5 years. In addition to this organic growth, NDAQ has made some meaningful acquisitions with the $10.5B Adenza acquisition being the most recent.

Financials

Q4 and FY2025 Results

The FY2025 Form 10-K is currently unavailable as I compose this post. I, therefore, recommend reviewing the Q4 2025 earnings release material.

NDAQ’s Q4 2025 diluted EPS is distorted from an unusually low effective tax rate of 21.2% (versus 24.3% in Q4 2024 and 26% in Q4 2023) resulting from the impact of a few discrete items. The FY2025 tax rate is 22.4% versus 23.8% in FY2024 and 25% in FY2023. Management anticipates the effective tax rate in FY2026 will revert to 22.5% – 24.5% due to the absence of one-time items and the expiration of certain benefits.

Conventional And Modified Free Cash Flow (FCF) Calculations (FY2020 – FY2025)

FCF is a non-GAAP measure, and therefore, its method of calculation is inconsistent. Many investors deduct CAPEX from OCF to arrive at FCF. In my How Stock Based Compensation Distorts Free Cash Flow post, I explain why I now also deduct stock based compensation (SBC) that is found in the Consolidated Statements of Cash Flows to determine FCF.

The variance in the FCF results NDAQ presents differs from online sources. This is because NDAQ makes a moderate adjustment to account for mandatory net Section 31 fees.

We add back net Section 31 fees when determining FCF because FCF should represent cash generation from a company’s core operations. We should, therefore, exclude fees and charges that are either non-operating or not reflective of the company’s ongoing cash-generating ability.

Section 31 fees are regulatory transaction fees imposed by the SEC on certain securities transactions to fund its oversight activities. These fees are operating outflows but are non-core or pass-through items, not regular operating expenses manageable by the business’s own cost structure.

The following is NDAQ’s method of calculating FCF for FY2022 – FY2025.

Return On Invested Capital (ROIC)

ROIC is calculated as (

High quality companies often generate a high ROIC. If a company generates a high ROIC, it needs to invest less to achieve a certain growth rate thus reducing the need for external capital.

When a company consistently generates a high ROIC over the long term and it is growing its revenue, it can reinvest a portion of its profits under favorable conditions thereby leading to a compounding effect. I would much rather invest in a growing company that can reinvest to create greater shareholder value than to invest in a company that has limited growth opportunities and thus chooses to distribute a growing dividend.

NDAQ’s financial performance over the last few fiscal years reveals a company in transition as it has shifted from a traditional exchange operator to a high-growth financial technology firm.

Below is the Return on Invested Capital (ROIC) and the estimated Weighted Average Cost of Capital (WACC).

FY ROIC (%) WACC (%) Economic Value Added (Spread)
2025 12.50% 9.20% 3.30%
2024 11.20% 8.80% 2.40%
2023 10.80% 8.10% 2.70%
2022 15.40% 7.40% 8.00%
2021 17.20% 5.30% 11.90%
2020 16.50% 6.10% 10.40%

 

In FY2023 and FY2024, NDAQ’s ROIC dipped primarily because of the massive capital outlay for the $10.5B Adenza acquisition which I cover in prior posts. This significantly increased the ‘Invested Capital’ denominator of the ROIC formula while net operating profit (NOPAT) took time to scale, temporarily compressing returns.

Prior to 2023, NDAQ’s debt-to-equity was in the low 20% range. This, however, spiked to the mid 30% range with new notes having coupon rates in the 5.35% to 6.10% range.

Similar to other tech-heavy financial firms, NDAQ’s WACC rose from a low of 5.3% in 2021 to over 9% by 2025. This increase was driven by the global hike in interest rates and larger debt load.

The firm’s focus on an ‘accelerated deleveraging plan’, however, bodes well for an improvement in ROIC.

FY2026 Guidance

The following reflects NDAQ’s FY2026 guidance.

The 2026 non-GAAP operating expense guidance reflects a non-GAAP organic growth rate of 7% at the midpoint. This includes the in-year benefit of net synergies action under NDAQ’s expanded cost program, a $25 million net decline due to divestiture and a small acquisition, and a nearly $20 million increase from FX, as well as a strong level of investments in growth and innovation, including AI.

Risk Assessment

NDAQ provides debt information on its website.

Moody’s lowered NDAQ’s long-term issuer rating to Baa2 from Baa1 in June 2023 when NDAQ announced it had signed an agreement to acquire Adenza Group. On March 31, 2025, Moody’s upgraded NDAQ’s domestic unsecured long-term debt credit rating from Baa2 to Baa1 with a stable outlook.

In November 2021, S&P Global raised NDAQ’s domestic unsecured long-term debt credit rating from BBB to BBB+ but then lowered it to BBB on June 12, 2023 for the same reason as Moody’s. On August 12, 2025, S&P Global raised NDAQ’s local currency long-term rating to BBB+ with a stable outlook from BBB with a positive outlook. The last review date is November 13, 2025.

Both ratings are the top tier of the lower medium grade investment grade category. The ratings define NDAQ as having adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

In FY2025, NDAQ paid down $0.826B of debt including $0.1B in Q4 to end the year with a gross leverage ratio of 2.9x, beating management’s prior expectation of 3.0x.

The following reflects NDAQ’s net debt position at FYE2025. Only ~$0.431B of LTD has a maturity date in 2026 and no debt matures in 2027.

Dividends, Share Repurchases, and Stock Splits

Dividend and Dividend Yield

NDAQ’s dividend history is accessible here.

Some investors pay particularly close attention to dividend metrics. The focus, however, should be ‘total potential investment return’.

Share Repurchases

The weighted-average common shares outstanding in FY2020 was 500.7 million. In Q4 2025 it was 576.5. The increase is the result of the issuance of shares to fund the major Verafin and Adenza acquisitions.

In September 2023, NDAQ’s Board approved an increase in its share repurchase authorization to a total of $2B. As of September 30, 2025, the remaining aggregate authorized amount under
the existing share repurchase program was $1.4B.

In Q4 2025, NDAQ repurchased 3.2 million shares for $0.286B bringing FY2025 repurchases to 7.2 million shares for $0.616B.

The table within the Conventional And Modified Free Cash Flow (FCF) Calculations (FY2020 – FY2025) section of this post reflects annual share repurchases in FY2020 – FY2025. In FY 2017 – FY2019, annual share repurchases amounted to ~$0.203B, ~$0.394B, and ~$0.2B.

Debt reduction has been a priority following the Adenza acquisition. NDAQ, however, has continued its share repurchases to offset employee stock compensation.

Management states that after reaching the leverage target level, the vast majority of remaining FCF is to be applied toward share buybacks. In addition, management does not anticipate making any significant acquisition-related capital allocation decisions that would deter the company from sizable stock buybacks over the coming years.

Stock Splits

NDAQ initiated a 3 for 1 stock split in 2022.

Valuation

NDAQ’s January 29, 2026 closing share price is ~$98.09. Using the current forward adjusted diluted EPS broker estimates, NDAQ’s forward adjusted diluted PE levels are:

  • FY2026 – 16 brokers – mean of $3.87 and low/high of $3.73 – $4.07. Using the mean estimate, the forward-adjusted diluted PE is ~25.3.
  • FY2027 – 14 brokers – mean of $4.34 and low/high of $4.13 – $4.55. Using the mean estimate, the forward-adjusted diluted PE is ~22.6.
  • FY2028 – 4 brokers – mean of $4.96 and low/high of $4.75 – $5.19. Using the mean estimate, the forward-adjusted diluted PE is ~19.8.

In FY2025, NDAQ generated ~$3.79 and $3.58 of FCF/share calculated using the conventional and modified methods. If NDAQ can generate ~$3.90 and ~$3.65 in FY2026, the forward P/FCF using a ~$98.09 share price is ~25.2 and ~26.9.

NDAQ’s FCF conversion ratio has been greater than GAAP and non-GAAP earnings in recent years. It is not surprising, therefore, that NDAQ’s valuation using FCF is slightly superior.

In my recent prior posts I wrote:

NDAQ’s share price at the October 23, 2025 market close is ~$88.82. Using the current forward adjusted diluted EPS broker estimates, NDAQ’s forward adjusted diluted PE levels are:

  • FY2025 – 19 brokers – mean of $3.41 and low/high of $3.26 – $3.47. Using the mean estimate, the forward-adjusted diluted PE is ~26.
  • FY2026 – 19 brokers – mean of $3.78 and low/high of $3.60 – $3.95. Using the mean estimate, the forward-adjusted diluted PE is ~23.5.
  • FY2027 – 14 brokers – mean of $4.22 and low/high of $4.04 – $4.45. Using the mean estimate, the forward-adjusted diluted PE is ~21.

In the first 3 quarters of FY2025, NDAQ generated $2.86 and $2.65 of FCF calculated using the conventional and modified methods. If NDAQ can generate ~$3.90 and ~$3.50 for the year, the forward P/FCF using a ~$88.82 share price is ~22.8 and ~25.4. These levels are slightly superior to those at the time of my prior review.

NDAQ’s FCF conversion ratio has been greater than GAAP earnings in recent years and the variance between diluted earnings and adjusted diluted earnings is not that material. It is not surprising, therefore, that NDAQ’s valuation using FCF is somewhat superior to when EPS are used.

When I composed my July 25, 2025 post the share price was ~$95. Management does not provide earnings guidance, and therefore, I extrapolate YTD2025 results and use the current forward adjusted diluted EPS broker estimates to estimate NDAQ’s valuation. NDAQ’s forward adjusted diluted PE levels are:

  • FY2025 – 18 brokers – mean of $3.32 and low/high of $3.18 – $3.41. Using the mean estimate, the forward-adjusted diluted PE is ~28.6.
  • FY2026 – 18 brokers – mean of $3.70 and low/high of $3.45 – $3.86. Using the mean estimate, the forward-adjusted diluted PE is ~25.7.
  • FY2027 – 13 brokers – mean of $4.14 and low/high of $3.81 – $4.38. Using the mean estimate, the forward-adjusted diluted PE is ~23.

In the first half of FY2025, NDAQ generated $1.969 and $1.829 of FCF calculated using the conventional and modified methods. If NDAQ can generate ~$4.00 and ~$3.70 for the year, the forward P/FCF using a ~$95 share price is ~23.75 and ~25.7.

NDAQ’s FCF conversion ratio has been greater than GAAP earnings in recent years and the variance between diluted earnings and adjusted diluted earnings is not that material. It is not surprising, therefore, that NDAQ’s valuation using FCF is somewhat superior to when EPS are used.

NDAQ’s valuation at the time of prior review has been lower than the current valuation. This is not surprising given the appreciation in NDAQ’s share price over the past 1.5 years far exceeds the appreciation in its underlying results.

Gauging a company’s valuation is heavily dependent on our assumptions. A significant component of NDAQ’s revenue and earnings is derived from its Market Services and Capital Access Platforms. The performance of these business segments is inherently volatile so trying to predict how NDAQ is likely to perform a few years into the future strikes me as being a crapshoot. I am, therefore, very reluctant to rely on earnings estimates beyond the current fiscal year.

Having said this, investor interest in equity investing remains robust and a greater degree of trading activity bodes well for NDAQ’s results!

Final Thoughts

NDAQ is benefiting from strong performance in technology stocks through its index business. Higher market valuations drive higher assets under management and fee revenue. This business receives most of its revenue from products tied to the Nasdaq 100 index making NDAQ a beneficiary of the outperformance of large-cap technology stocks. In Q4, NDAQ’s:

  • US equity derivatives revenue increased due to strong industry volumes, volatility and growth in index options, partially offset by lower capture and market share;
  • US cash equities revenue increased primarily from higher industry volumes and volatility, partially offset by lower capture; and
  • European cash equities revenue grew largely due to industry volumes and higher market share.

Low IPO volume, however, has been a major headwind for its listing business.

I anticipate that NDAQ’s consolidated revenue growth will slow in 2026 as 2025 results benefited from strong cyclical growth. Trading volume and index revenue growth is likely to normalize in 2026 thus creating headwinds to FY2026 results.

Shares have generally been overvalued for at least a decade with the exception of a brief period in 2022 and most of 2023 when shares were slightly undervalued.

In my prior post I state that I want NDAQ’s share price to retrace to at least the low $80s before I consider increasing my exposure. Now that NDAQ’s leverage target level has been reached and a larger percentage of excess FCF is available for deployment toward share repurchases, a ~$90 share price or lower is a level at which I would consider increasing my exposure.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to finfreejourney@gmail.com.

Disclosure: I am long NDAQ.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.