The company operates through six segments:

  • Morningstar Data and Analytics, which provides research, reporting and analysis to help investors make decisions.
  • Pitchbook, a platform offering free access to a vast collection of data.
  • Morningstar Wealth brings together a range of services, including ratings for financial products (equities, ETFs, bonds, etc.), software to assist management and virtual portfolios.
  • Morningstar Credit is a credit rating agency.
  • Morningstar Retirement offers tools designed to help individuals achieve their retirement goals: personalized recommendations, help with building retirement plans and appropriate fund allocation, etc.
  • The remainder includes various minor activities such as Morningstar Indexes, which provides market indices, and Morningstar Sustainalytics, which focuses on ESG themes.

The Morningstar model generates 75% of revenues from licenses, sold on a subscription basis. Sales are thus regular and fairly predictable. Growth is therefore based on new customers, acquisitions and price increases.

Let's start with the last metric: price increases. Morningstar has an excellent reputation and its service is reliable. The company's clientele consists mainly of companies with substantial financial resources (financial institutions, investment funds, etc.). The group has the famous "pricing power", i.e. the ability to manage the prices of products and services without depressing demand.

The second point is acquisitions. Morningstar doesn't make many. Over the last ten years, only two acquisitions have made their mark: that of DBRS in 2019, which greatly contributed to the development of the credit analysis business, and that of LCD in the provision of data, news and analysis in 2022. Both acquisitions were great successes, well integrated into the Group's perimeter.

Sales growth by revenue type (source: Morningstar)

Finally, organic growth. In recent quarters, organic growth has regularly exceeded 10%. The negative point here is that Morningstar is fairly dependent on the economic climate in its sector: clients tend to drastically reduce their investments when the financial markets are sluggish. This can be seen in 2022, a gloomy year for the financial sector: organic growth came out well below 10%.

So, in terms of growth, Morningstar is doing rather well. But for almost a decade now, there has been one big sticking point in the financial statements: margins. These tend to erode. Server costs, software expenditure and personnel expenses are growing faster than revenues. As a result, net profitability reached 6.8% last year, compared with nearly 17% ten years ago. By 2023, earnings per share were below their 2016 levels. At the same time, the share price has quadrupled, largely thanks to the company's "tech" profile and impressive sales growth.

Free cash flow (or profit cash, the money actually available at the end of the financial year) is better, underpinned by low capital expenditure (Capex). Capital allocation mainly concerns the repayment of debt, which, incidentally, is well under control, and the payment of a modest dividend.

Morningstar is heavily valued, at over 40 times earnings for this year. The stock has regained its appeal in recent months: profitability is set to pick up over the next few years, aided by various cost-cutting measures. In this context, such a valuation is acceptable. But Morningstar has no room for disappointment. Otherwise, the penalty will be heavy.