Innovative ETFs And Non-Listed Products Steer Company Towards Stellar Revenue And Profitability Growth

Key Takeaways

• MSCI's growth is driven by strong demand for its products, particularly ETFs and non-listed products, with strategies targeting long-term industry trends for sustained growth.
  
• Innovation and strategic partnerships, like with Moody's, alongside focusing on expanding market segments, underpin MSCI's efforts to diversify income sources and enhance its customer base.
  
• Challenges like market headwinds, increased competition, partnership risks, higher cancel rates, and strategic focus on share repurchases could impact MSCI's revenue and growth.

Catalysts

Provides critical decision support tools and solutions for the investment community to manage investment processes worldwide.

• The strong adjusted earnings per share growth of 12% and organic revenue growth of 10%, driven by asset-based fee revenue growth of 18%, are indicative of robust demand for MSCI's products, particularly in ETFs and non-listed products linked to MSCI Indices. This demand could further enhance revenue and profitability by increasing asset-based fees and subscription sales.
  
• MSCI's strategy to capture long-term secular trends disrupting the investment industry, such as the demand for high-quality data-driven models, increased transparency, and more outcome-oriented investment solutions, positions it well for sustained future growth. This strategic focus is expected to bolster revenue streams by aligning MSCI's offerings with evolving industry needs, enhancing earnings potential.
  
• The strategic partnership with Moody's and the launch of new products like MSCI AI Portfolio Insights signal a strong innovation pipeline and expansion into new market segments. Such innovations and collaborations can significantly expand MSCI's customer base and product offerings, potentially improving revenue and diversifying income sources.
  
• The company's focus on expanding its footprint in rapidly growing client segments like wealth managers and insurance companies, coupled with its efforts to strengthen its position in traditional client segments, indicates potential for both market expansion and retention. This strategic expansion is likely to further drive subscription revenue growth and improve client retention rates.
  
• MSCI's significant share repurchases, exemplified by the repurchase of $290 million worth of shares, underscore a commitment to returning value to shareholders and confidence in the company's intrinsic value. Such financial strategies may contribute to earnings per share growth, positively impacting shareholder value and potentially underscoring the company's undervaluation.

Assumptions

• Analysts are assuming MSCI's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.9% today to 41.5% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $19.02) by about August 2027, up from $1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.7x on those 2027 earnings, up from 34.3x today. This future PE is greater than the current PE for the US Capital Markets industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Risks

• MSCI may face challenges from potential market headwinds that could impact its near-term performance, possibly affecting revenue growth rates.
  
• Increased competition in the private market indices space could impact MSCI’s ability to become the global leader in this domain, potentially affecting its margins and revenue from new product segments.
  
• Relying on partnerships, such as the one with Moody's, for expanding ESG and sustainability content might introduce dependency risks, potentially impacting revenue growth in ESG segments if these partnerships do not yield expected results.
  
• MSCI anticipates elevated cancel rates in Q3 compared to the previous year, which could lead to decreased revenues and affect retention rates, impacting overall financial performance.
  
• The company’s strategic focus on capital allocation through share repurchases may impact its liquidity and ability to invest in growth opportunities, potentially affecting long-term revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $587.33 for MSCI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $650.0, and the most bearish reporting a price target of just $495.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.5 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 37.7x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $517.43, the analyst's price target of $587.33 is 11.9% higher.
  
• 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.