Is It Time To Sell Nasdaq Inc (NASDAQ:NDAQ) Based Off Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Nasdaq Inc (NASDAQ:NDAQ)’s fundamentals and stock market performance.
Nasdaq Inc (NASDAQ:NDAQ) is currently trading at a trailing P/E of 20.6x, which is higher than the industry average of 16x. While NDAQ might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Nasdaq
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for NDAQ
Price-Earnings Ratio = Price per share ÷ Earnings per share
NDAQ Price-Earnings Ratio = $91.87 ÷ $4.463 = 20.6x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to NDAQ, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. NDAQ’s P/E of 20.6x is higher than its industry peers (16x), which implies that each dollar of NDAQ’s earnings is being overvalued by investors. Therefore, according to this analysis, NDAQ is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your NDAQ shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NDAQ. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with NDAQ, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing NDAQ to are fairly valued by the market. If this does not hold, there is a possibility that NDAQ’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to NDAQ. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for NDAQ’s future growth? Take a look at our free research report of analyst consensus for NDAQ’s outlook.
Past Track Record: Has NDAQ been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of NDAQ’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
