We came across a bullish thesis on MSCI Inc (MSCI) on ValueInvestorsClub by Paradox. In this article we will summarize the bulls’ thesis on MSCI. MSCI shares were trading at $464.49 when this thesis was published, vs. closing price of $524.39 on Aug 7.
A financial analyst pointing to a graph showing the MSCI EAFE Index market performance.
MSCI Inc., a leading global provider of financial indexes and analytics, has recently seen its stock take a hit, dropping over 25% from its peak and falling 13.43% after its latest earnings report. This decline, however, may offer a rare opportunity for investors to acquire a high-quality, globally diversified asset-light company at a discounted price.
At the core of MSCI’s appeal is its formidable competitive advantage in the financial sector. The company’s wide moat is primarily built on network effects and brand strength, reinforced by its dominant position in the index business. With a minimal number of major competitors, MSCI benefits from premium industry margins and a robust recurring customer base. This is due to the high switching costs associated with its products, which ensures strong customer retention rates.
MSCI’s financial health and growth prospects are equally impressive. The company has demonstrated consistent double-digit cash flow growth over the past decade, averaging an impressive 18% annually. This growth trajectory is underpinned by industry tailwinds such as the rise of passive investing, equity market growth, and the formation of emerging and foreign capital markets. The ongoing shift toward passive investing further supports MSCI’s business model, which benefits from increased demand for index products.
MSCI’s capital allocation strategy reflects a commitment to investing in growth while returning excess cash to shareholders through dividends and share buybacks. The company has repurchased about one-third of its shares over the past decade, demonstrating a disciplined approach to capital management.
The company’s primary revenue stream comes from licensing subscriptions for its indexes to global asset managers. MSCI offers a vast array of indexes—160,000 in total—covering diverse markets and sectors worldwide. As of late 2023, the global stock market capitalization was $109 trillion, with emerging markets comprising 27% of this figure. This represents a significant growth opportunity for MSCI as emerging markets continue to develop and capture a larger share of global GDP.
Despite recent challenges, including weaker-than-expected recurring sales and regulatory hurdles for its ESG and climate analytics division, MSCI’s business remains robust. The company’s ESG analytics segment, although facing some pressure, continues to grow at a rate of 20% per year, driven by strong demand in Europe and a gradual uptake in the U.S. The broader trend towards passive investing and the ongoing evolution of global financial markets provide a solid foundation for MSCI’s continued success.
Currently trading at a cash flow yield of about 3.2%, MSCI offers an attractive valuation considering its track record of growth and profitability. With expectations of continued cash flow growth and a reduction in shares outstanding over the next five years, the stock presents a compelling investment opportunity. As Warren Buffett aptly put it, “When you find a really good business run by first-class people, chances are a price that looks high isn’t high.”
In summary, the recent stock price decline presents a chance to invest in a leading financial services company with a strong competitive position, solid management, and promising growth prospects. For those who recognize the value in MSCI’s business model and long-term potential, this moment may represent an excellent buying opportunity.
MSCI is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 53 hedge fund portfolios held MSCI at the end of the first quarter which was 43 in the previous quarter. While we acknowledge the potential of MSCI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as MSCI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
