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BofA Securities double downgraded Nasdaq (NASDAQ:NDAQ) to Underperform from Buy on Thursday, lowering the price target on the stock to $58 from $65 per share.
Analysts said the firm has become increasingly cautious on exchanges due to their all-time high valuations and growth engines slowing while being more bullish on Alts.
“The NDAQ stock and the exchange industry have become less attractive to us given their all-time high relative valuations (NDAQ & CME are 2/3 most expensive names in our coverage), crowded investor positioning (market too focused on NT defense vs. LT growth potential) and a more challenging overall setup for growth,” analysts wrote. “These challenges to growth are partly driven by cyclical headwinds (downward normalization in volatility/volumes and retail disengagement), secular headwinds (low growth of mature cash equities business) and multiple idiosyncratic factors for NDAQ.”
One of the idiosyncratic factors analysts refer to is equity options, with “MEMX’s 2Q23 launch and NYSE price cuts” potentially intensifying competition, while “SEC rulemaking on gamification could hurt industry volumes,” creating downside risk for EPS. The other factor is market technology, with Siegenthaler writing that after calls with industry contacts/consumers of anti-financial crime technology, they “are anticipating decelerating segment growth and foresee challenges to Verafin’s plan to improve adoption from Tier 1 banks.”
“Although our total return is positive, it places NDAQ at the low end of our coverage. Our thesis reflects its premium valuation as well as several risk factors for 2023 including volume headwinds, retail disengagement, and Market Tech growth deceleration. While we look for NDAQ to meaningfully grow EPS in 2024, we expect a more tepid EPS increase in 2023 (5% y/y),” analysts added.
