Financial services firm MSCI (NYSE:MSCI), which runs the MSCI global stock indexes, saw its stock price plummet some 14% on Tuesday — despite posting first-quarter results that beat earnings estimates.
What drove the steep decline on a day when all of the major market indexes were trending higher? Letʻs take a look at MSCIʻs first-quarter earnings results for answers and to see if it is time to buy.
Elevated cancellations may have spooked investors
MSCI’s plunging share price appears to be a bit of a head-scratcher when you look at the solid results it posted for Q1 2024. The company’s operating revenue rose 15% year over year to $680 million, which was a solid gain even though it was slightly below the analysts’ consensus estimate.
On the bottom line, MSCI beat estimates with $256 million in net income or $3.22 per share — up 7% from the first quarter of 2023.
MSCI has two business lines: indexes and analytics. Within the index business, it generates fees from licensing its indexes for use by exchange-traded funds, mutual funds and other investment vehicles. The fees are asset-based, so when the markets are up, the fees are higher.
MSCI also generates revenue through recurring subscriptions, which provide clients access to its indexes through a subscription. The company generated $150 million in asset-based fees in the first quarter, an increase of 13% year over year, and $213 million in recurring subscription fees, up 8%.
In the analytics business, MSCI provides market data and intelligence for institutional investors, generating revenue through recurring subscriptions. The company made $160 million in this business in the quarter, up 11% from the same quarter a year ago.
Even though MSCI’s revenue missed estimates, it probably did not miss by enough to warrant a sell-off of the magnitude of the one that occurred on Tuesday. Rather, investors were likely spooked by an unusually high number of subscription cancellations, as MSCI Chairman and CEO Henry Fernandez explained in the earnings report.
“Elevated cancels reflected a concentration of unusual client events, including a large merger among our banking clients. We are managing through these pressures and do not expect this level of cancels to continue,” Fernandez said.
Should investors be concerned?
MSCI is a solid stock and a company with a great business model. It is one of only a handful of index providers, so it has somewhat of a moat in that business, and it has high margins due to the fact that it has low overhead and is asset-light. Further, MSCI’s recurring subscription revenue and fees provide a steady flow of operating cash it can use to fund future growth.
Subscription cancellations are certainly a concern, but it appears to be from a big merger and “unusual client activity,” according to Fernandez. Investors should definitely keep an eye on that in the coming quarters to make sure it was just a blip and not a broader trend.
Overall, Tuesday’s sell-off may create a buying opportunity as MSCI stock had gotten expensive. It is currently trading at 35 times earnings, down from 47 at the start of the year. Although MSCI is still slightly overvalued, it may become more attractive if its stock price drops a little more.
Analysts appear to be generally bullish on the stock as it has a consensus price target of $632 per share, which would be 43% higher than its current price.
Given the sluggish market right now, I would not be surprised if MSCI stock falls a bit more in the near term. However, when the price is right, some investors might want to consider buying this stock. MSCI has been a great long-term performer, with an average annualized return of 26% over the past 10 years.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
