In early May, Morningstar (NASDAQ:MORN) launched its IPO at $18.50 per share. The company wanted to give all prospective investors a shot at getting shares at the offering price, and so used WR Hambrecht's online Dutch auction system.

It was a good deal for investors; the stock hit an all-time high of $31.55 yesterday as the company just reported strong results for its second quarter. Revenue was $56.2 million, a 30% increase from the same period a year ago. During this time, net income increased from $1.3 million, or $0.03 per share, to $9.5 million, or $0.22 per share. Free cash flow was $12.6 million for the quarter, which was a $3.7 million improvement over the same period a year ago. In all, the company has $116 million in the bank.

Morningstar indicated that it got a boost in business from the Global Analyst Research Settlements (GARS). This is a $450 million fund set aside to provide independent research alongside sell-side research. Morningstar has been providing such research to five investment banks since the third quarter of 2004. Given that GARS is set for five years, this should be a consistent business for Morningstar going forward. Since the company started providing research to these banks less than a year ago, quarter-to-quarter comparisons are skewed. The better test will be to see how growth continues for the next six months.

Something else that's attractive about Morningstar is its subscription-based business model, which creates a recurring revenue stream. The company calls this "walk-in revenue" -- that is, the revenue from subscriptions and licensing that is in place at the beginning of the year. This is expected to be $193.3 million for 2005. In other words, Morningstar has a lot of visibility in its revenue forecast.

This brings up another nice aspect of subscription-based models -- economies of scale. Initial production of services and distribution costs are relatively low, while prospective revenue capture is quite high, leading to strong margins (provided the company is able to move sufficient product).

On the earnings news, Morningstar's stock surged nearly 20%. The valuation is definitely heady with a P/E ratio in excess of 150 and a price-to-sales ratio of 6.3. While Morningstar should benefit from continued activity in the equities markets, this stock is far from cheap. Ironically enough, it is probably a stock that would not fit the value parameters set by Morningstar's own fine, independent research principles.

Fool contributor Tom Taulli does not own shares mentioned in this article.