NASDAQ Stock is Up - Still Worth Buying Here?

A month ago, Nasdaq, Inc. (NDAQ) reported strong free cash flow and a +13% dividend hike. Since then, NDAQ stock is up as we recommended in a prior Barchart article. One way to play is to Short out-of-the-money put options. That provides a lower buy-in target as well as extra income.

NDAQ is at $82.05 in midday trading on Monday, May 19. This is up from a recent low of $66.40 on April 8, but below its 6-month peak of $83.76 on Feb. 6.

Dividend Yield-Based Price Target

In an April 25 Barchart article, I showed that NDAQ stock could be worth between $83 (median price) and $90 (mean) per share ("Nasdaq Inc Reports Massive Free Cash Flow and a 13% Dividend Hike - NDAQ Stock Looks Cheap").

For example, right now, NDAQ has a 1.316% annual yield with its $1.08 dividend per share (DPS). This is below its average yield over the past 5 years, according to the Yahoo! Finance statistics page (i.e., 1.34%). Similarly, Morningstar says its average has been 1.32% over the last 5 years.

So, using a 1.33% average, here is what NDAQ is worth:

  $1.08 DPS / 0.0133 = $81.20 target price

So, based on that divided yield metric, NDAQ is slightly overvalued.

P/E Based Price Target

Another way to value NDAQ is to use its historical forward price/earnings (P/E) multiples. For example, Seeking Alpha says its average forward P/E multiple has been 22.79x over the last 5 years. Similarly, Morningstar's forward multiple average is 22.3x, for an average multiple of 22.55x

Here's how we can use that. Analysts expect earnings per share (EPS) this year will be $5.04. Using the average multiple, here is the price target:

   $5.04 EPS x 22.55 = $113.65 target

Moreover, the estimate for 2026 is $5.38 EPS (i.e., $5.21 EPS run rate over the next 12 months (NTM)). So, using that average, the price target is:

   $5.21 NTM EPS x 22.55 forward P/E = $117.49 target

Therefore, NDAQ is worth somewhere between $113.65 and $117.49, or about $115.57.

In sum, averaging these two price targets ($81.20 dividend yield, $115.57 P/E based), NDAQ looks to be worth $98.35 per share. That still provides a +20% potential upside:

  $98.35 / $82.06 today = 1.1985 -1 = +19.9%

However, there is no guarantee this will happen in a straight line, if at all, over the next 12 months.

One way to play this, to set a lower buy-in target, is to sell out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts

For example, look at the June 20 expiration period, one month from now - i.e., 32 days to expiry (DTE). It shows that the $77.50 strike price put option has a 60-cent midpoint premium.

That strike price is over 5% below today's price - i.e., out-of-the-money. That means the stock has to fall over 5% before a short-seller's account would be assigned to buy the shares at $77.50.

Meanwhile, the short seller makes an immediate yield of 0.77% (i.e., $0.60/$77.50).

That is not a great yield, but at least it shows that the investor can get paid while waiting to buy in at a lower price.

It also means that even if NDAQ falls to $77.50, the breakeven point for the investor is lower at $76.90 (i.e., $77.50 - $0.60), or 6.4% below today's price.

Note that there is a low probability of this occurring over the next month. The delta ratio is less than 19% (-0.18566), showing that based on past trading patterns, there is a low probability of NDAQ falling to $77.50 in 32 days.

The bottom line is that NDAQ still looks cheap here, and shorting OTM puts might be a good way to play the stock for investors.  Moreover, existing investors can make extra income and potentially lower their overall cost basis by shorting these OTM puts.