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Stock Strategist

The Changing Face of Nasdaq OMX

Acquisitions are helping the exchange operator tap other revenue sources.

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In the evolving world of financial exchanges,  Nasdaq OMX Group (NDAQ) is zigging and zagging to remain vibrant. We believe the company is right to develop alternative revenue streams, which have widened via acquisitions. But given the changes, we think investors would benefit from an exploration of our view of the large exchange operator's strategy and performance to better understand the potential upside to the shares. And while significant challenges remain, in an improved operating environment and with proper execution, we think Nasdaq could be worth up to 21% above our current fair value estimate.

The company has gone through its share of recent turbulence, as major systems problems sullied its image twice in the last two years, drawing regulatory scrutiny and possibly imperiling future business. Meanwhile, the competition is bulking up, as two exchange deals are in the works that will fuse some of Nasdaq's staunchest rivals into larger companies that may be in stronger positions--closely held BATS Global Markets and Direct Edge are merging whereas NYSE Euronext was acquired by  IntercontinentalExchange (ICE). But Nasdaq isn't standing still. Under CEO Robert Greifeld, Nasdaq is busy integrating two acquisitions of its own--a suite of corporate-services businesses acquired from  Thomson Reuters (TRI), and the eSpeed U.S. Treasury trading platform from  BGC Partners (BGCP)--that are injecting valuable additional diversity into the company's operations.

Gaston F. Ceron does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.