Automation And Regulations Will Compress M&A Revenues Despite Growth Efforts

Key Takeaways

• Accelerating digital disruption and direct capital access threaten Moelis's traditional advisory model, compressing fees and increasing long-term revenue volatility.
  
• Heavy dependence on transaction-based revenues and rising competition expose Moelis to earnings instability and ongoing margin pressure.
  
• Strategic expansion, strong market momentum, and a robust balance sheet position Moelis for sustainable growth, resilience across cycles, and potential for improved shareholder returns.

Catalysts

Operates as an investment banking advisory firm in North and South America, Europe, the Middle East, Asia, and Australia.

• The rapid proliferation of AI and automation in deal sourcing, execution, and due diligence threatens to displace the traditional high-touch advisory model, potentially leading to a sustained compression of advisory fees and reducing Moelis's future revenue growth and margins.
  
• As companies increasingly bypass financial intermediaries by accessing capital markets directly-enabled by digital platforms and alternative funding sources-Moelis faces structural disintermediation, which could shrink its addressable fee pool and drive long-term revenue volatility.
  
• Rising regulatory complexity, particularly around cross-border transactions and antitrust enforcement in global M&A, is expected to raise compliance costs and slow down deal flow, putting persistent pressure on the firm's ability to generate stable revenues and maintain earnings resilience.
  
• Heavy reliance on transaction-based revenues exposes the firm to pronounced cyclicality; if capital markets activity reverses or macro conditions deteriorate, Moelis's earnings and net margins could experience sharp contractions due to a lack of diversification into more stable business lines such as asset or wealth management.
  
• Increased competition-both from larger, integrated global banks and boutique firms with expanded sector expertise-may lead to sustained fee compression and declining market share, which over the long term would erode Moelis's revenue base and profitability despite current record-high revenues and aggressive hiring.

Moelis Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Moelis compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Moelis's revenue will grow by 13.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.3% today to 19.7% in 3 years time.
• The bearish analysts expect earnings to reach $394.6 million (and earnings per share of $4.57) by about September 2028, up from $198.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, down from 27.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 5.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Moelis Future Earnings Per Share Growth

Risks

• Moelis is experiencing strong revenue growth, reporting a 38% increase year-over-year in the second quarter and maintaining record-high revenues, which, if sustained by positive deal and market momentum, could lead to ongoing improvements in revenue, net margins, and earnings.
  
• The firm's aggressive expansion into private capital advisory and new verticals, with strategic hires of top industry talent, positions it to capture significant additional addressable market, supporting both topline growth and future profitability.
  
• Management emphasized active investments in high-growth opportunities and the ability to flexibly deploy resources, suggesting Moelis can capitalize on long-term secular trends like increased private equity activity, which could buffer revenue through business cycles and enhance net margins.
  
• The pipeline for new transactions is near record levels and broad-based across sectors, indicating that Moelis stands to benefit from the structural rise in M&A and capital markets activity, supporting robust medium
• and long-term revenue stability and earnings growth.
  
• A strong balance sheet with no debt, large cash reserves, and ongoing discussions to return excess capital to shareholders through buybacks or dividends reduces financial risk and could lead to higher shareholder returns, which may positively influence the share price.

Valuation

• The assumed bearish price target for Moelis is $65.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Moelis's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $394.6 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $73.29, the bearish analyst price target of $65.0 is 12.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.