Morningstar Direct Platform and Morningstar PitchBook are the two operating segments in this category.
The next is asset-based, where fees are charged for assets under management (AUM). These arrangements typically range from one to three years as well.
Morningstar Wealth and Morningstar Retirement are the two operating segments under this category.
The final one is transaction-based, covering revenue derived from surveillance and research and is generally one-time in nature.
Morningstar Credit is the operating segment under this revenue type. Morningstar Direct Platform contributes around 35% of the company’s total revenue, while Morningstar PitchBook generates almost 30%.
Hence, the licence-based revenue accounts for roughly two-thirds of the company’s total revenue.
Morningstar Wealth and Morningstar Retirement generate around 10% and 5% of the company’s total revenue, respectively, while another 15% is generated by Morningstar Credit. This suggests that recurring revenue generally dominates the company’s revenue, at least with shortterm visibility.
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Investment thesis
The investment case for Morningstar is similar to the companies discussed in previous issues: it is cheap at current valuations. The market sometimes allows investors to buy these stocks, which can fall in value for fickle reasons.
Morningstar has dropped over 35% year to date and the company’s value and projected value certainly do not justify the share price drop, making it an undervalued stock.
Tailwinds and headwinds of a company are more meaningful if they are quantifiable since they’re forward-looking.
Looking at the company’s historical financials can also give an indication of the volatility of a business.
Chart 1 illustrates the 10- year financials of Morningstar and a two-year projection of its financials, from Wall Street estimates.
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A key point to note is that Morningstar’s share price is currently around the 2022/2023 level, but the 2022/2023 financial performance is significantly worse than what it is now.
Diving deeper into the company’s latest 3QFY2025 results, its largest segment, Morningstar Direct Platform, grew 6.3% y-o-y revenue-wise while its operating income grew by 2.5% over the same period.
The operating margin currently stands at 44.4%, and high margins for its proprietary data segment are a strong indication of a strong moat and competitive advantage.
Similarly, the Morningstar PitchBook, which covers proprietary research, grew 7.9% y-o-y revenue-wise and 5.0% y-o-y operating income-wise. The adjusted operating margin for this segment is also strong at 31.3%.
Best business segment
The best-performing operating segment was Morningstar Credit, which provides investors with credit ratings, research, data and credit analytics solutions. This segment grew revenue by 28.5% y-o-y, while operating income grew by 84.9% over the same period.
Morningstar Wealth rose 0.5% y-o-y revenue-wise and turned positive for its operating profits y-o-y. In comparison, Morningstar Retirement grew revenue 7.5% y-o-y while maintaining its operating profits from the previous year.
Essentially, every segment grew y-o-y.
As AI becomes more prevalent, Morningstar has also incorporated it into its business plans through three different ways, indicating that the business is adapting to changes.
The first is to launch AI-ready versions of its content, essentially commercialising the company’s intellectual property. To support this, the company is working with AI providers, such as its recent partnership with Anthropic, a large language model (LLM) provider.
The other way Morningstar is utilising AI technologies is by accelerating its speed-toinsights for its products and streamlining workflows.
The third way is to boost team operations, such as using AI to automate repetitive data tasks and integrating AI into development lifecycles to shorten the time to bring new features and products to market.
Chart 2 shows the return on equity and assets of the company, along with Morningstar’s adjusted operating margins over the past eight quarters.
The company’s profitability has grown well over this period, along with its margins, indicating solid profitability.
Morningstar’s overall financial health is good. For short-term liquidity, a current ratio of 1.04, which is above the benchmark of 1, indicates that the company’s short-term financial obligations are unlikely to pose a problem.
Although the company’s net debt-to-equity ratio is 35%, its interest coverage ratio is over 13 times, indicating that financial distress is an unlikely concern for the company.
Also, the company’s Altman Z-score is 7.5 times, significantly above the benchmark of three times, and along with its investment-grade debt, reflects that the company is financially healthy with a very low probability of default.
Valuing the stock
In terms of relative valuation, Morningstar trades at a 21% discount to global peers, based on its forward P/E ratio.
Also, compared to its historical average, Morningstar currently trades at a 29%, 22% and 24% discount to its one-year, two-year and five-year historical P/E averages, respectively. This shows that Morningstar is an attractive pick-up not only compared to peers in its industry but also based on the average range it has traded over multiple periods, indicating it is undervalued.
The company also pays dividends quarterly, with a current yield of 0.85%. Although this may seem like a low figure, in Q3FY2025 the company allocated almost 10 times more capital to share repurchases than to dividends (US$170 million versus US$19 million).
Share repurchases are a form of investor return as they increase the value of remaining shares. Sentiment-wise, there are two “buy” calls, one “hold” call and no “sell” calls for Morningstar from analysts over the next 12 months, with an average target price of over 30% above its current trading price of US$213.72.
Based on a methodology that includes multiple valuation methods (see Charts 3a & 3b), the company’s intrinsic value is US$286.71, which is almost 35% above its current trading price.
For Singapore investors seeking to purchase this stock, they may do so without much hassle through their international trading account, as this company is a mid-cap US stock listed on Nasdaq.
Disclaimer: This article is strictly for information purposes only and does not constitute a recommendation, solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. Any personal investments should be made at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk. The author of this article does not hold or own the stock(s) featured in this article or have a vested interest in it at the time of writing.
