MSCI (MSCI -1.99%) is a financial data provider and software company most known for creating and managing the MSCI (Morgan Stanley Capital International) stock market indexes. It also provides investment analytics for portfolio managers and research on environmental, social, and governance (ESG) issues. These businesses are all growing and exposed to long-term tailwinds and present investors with an interesting opportunity to bet on a company with strong long-term prospects.
How MSCI makes money
MSCI has its hands in a couple of distinct businesses that generate revenue in different ways. It's most known for its index business, which is also its largest business segment by sales. An index is a grouping of financial securities that are put together by a set of rules. For example, the S&P 500 index is a specialized collection of the 500 largest companies in the United States by market capitalization.
MSCI maintains over 215,500 indexes of various types for its clients. Some of these indexes are licensed to asset management companies which use them to create investment products. If an asset manager launches a product based on an MSCI-constructed index, the asset manager will pay MSCI a cut of the fees it collects from investors. Other clients contract MSCI to make private indexes and pay a recurring subscription fee for the service.
As the table below shows, the index segment generates roughly 40% of the company's revenue. Asset-based revenue refers to the income from asset managers who manage investment products with MSCI's indexes and pay MSCI a cut of the fees. Most of the company's remaining sales is attributable to recurring revenue from subscription clients.
|Type of Revenue||Index Segment||Analytics Segment||ESG & Real Estate Segment|
|Subscription||$477.6 million||$474.3 million||$114.6 million|
|Non-recurring contract||$21.3 million||$5.6 million||$3.9 million|
|2018 total segment||$835.5 million||$479.9 million||$118.6 million|
The company's analytics segment sells software on a subscription basis to clients in the asset management industry. MSCI sells software for a variety of purposes, including portfolio management, risk analytics, and return analytics. The software can help a client build a portfolio or analyze various statistics derived from its portfolio or specific securities.
The final segment addresses ESG and real estate markets. MSCI provides original research on environmental, social, and governance issues facing companies and then packages the research in a recurring subscription. The company's real estate offerings provide research and analytics on the real estate market, including information on private properties.
Put it all together and MSCI has three very different businesses that derive their revenue through diverse means.
MSCI is positioned to benefit from several long-term growth themes in its different businesses. Most notably, there's an ongoing shift in the investment industry toward managing portfolios to more passive indexes and following passive guidelines. MSCI is directly licensing its indexes to investors but also selling analytics software to help investors track how their portfolios perform relative to different benchmarks and investment styles (i.e., value, growth, momentum).
More generally, MSCI is a data provider to the financial services industry. The financial services industry has always been a very data-centric industry, but more recently, there has been an ongoing race to collect more data assets and invest in software to improve and expand investment capabilities.
Finally, research for the ESG and real estate fields is in hot demand. ESG considerations are becoming more relevant due to changing societal priorities with issues such as climate change and gender equality. Real estate has always been lacking in data due to a lack of public disclosures, and companies like MSCI are compiling proprietary data assets that managers find highly valuable.
Overall, MSCI projects that it will be able to grow its top-line revenue at a double-digit rate for the foreseeable future. Better yet, it also believes its expenses will grow at a slower rate. That translates into expanding profit margins. Investors have a lot to look forward to.
A high-quality (but expensive) stock
MSCI has an attractive set of businesses. Its index business benefits from the MSCI brand and its analytics businesses benefit from solid long-term tailwinds in providing data for the financial services industry.
There's a catch, however. MSCI's stock valuation doesn't come cheap. The stock price has appreciated to near all-time highs and carries a price-to-earnings (P/E) ratio around 34 -- which is much higher than the average P/E ratio of the S&P 500 (currently at 21.3).
Despite the high valuation, MSCI's stock may be worth buying because it likely will grow into its multiple over time. If the company continues growing its revenue at a double-digit rate and its earnings at an even faster rate, it will look cheap within five years.
However, the company is directly exposed to the cyclical financial services industry. Therefore, savvy investors may want to wait for a better buying opportunity if the stock declines in a broader market sell-off.