We came across a bullish thesis on Moody’s Corporation (MCO) on Substack by Business Model Mastery. In this article, we will summarize the bulls’ thesis on MCO. Moody’s Corporation (MCO)'s share was trading at $519.27 as of Feb 19th. MCO’s trailing and forward P/E were 46.12 and 37.45 respectively according to Yahoo Finance.
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Moody’s Corporation is a dominant force in the credit ratings and financial analytics industry, generating $6.59 billion in revenue in 2023. The company operates through two primary segments: Moody’s Investors Service (MIS), which accounted for 60% of total revenue, and Moody’s Analytics (MA), contributing the remaining 40%. MIS remains the core driver of profitability, benefiting from its essential role in global debt issuance. As corporations and governments seek credit ratings to optimize borrowing costs, demand for MIS services rises, making it a key beneficiary of strong capital markets activity. Moody’s Analytics, on the other hand, has been steadily expanding, providing risk modeling, economic forecasting, and regulatory solutions to financial institutions. While smaller than MIS, this segment generates high-margin recurring revenue, helping diversify the company’s earnings stream.
The business model is underpinned by a robust mix of subscription-based and transaction-driven revenue. More than 80% of Moody’s overall revenue is recurring, providing stability even during market downturns. This high level of predictability makes Moody’s a resilient business, particularly in uncertain economic environments. However, its reliance on bond issuance cycles means that periods of slower debt activity can impact its ratings business more than competitors with broader revenue bases, such as S&P Global. Nonetheless, Moody’s has taken steps to mitigate this cyclicality by aggressively expanding its analytics segment, particularly in financial risk, enterprise software, and ESG-related data.
Moody’s has also focused on international growth, with 57% of revenue coming from the United States, 28% from Europe, the Middle East, and Africa (EMEA), 11% from the Asia-Pacific region, and 4% from Latin America. This global reach allows the company to capitalize on increasing cross-border issuance and the growing demand for credit ratings and analytics in emerging markets. Despite its U.S.-centric foundation, Moody’s has been investing in international expansion, particularly in Europe and Asia, to capture a larger share of global debt markets and risk analytics.
Profitability remains a key strength, with Moody’s recording a gross margin of 72.1%, an operating margin of 45.5%, and a net margin of 32.4% in 2023. These figures place it ahead of many peers, largely due to the highly scalable nature of its credit ratings business. Once a rating is established, the ongoing cost of maintaining it is minimal, leading to exceptionally high margins. Free cash flow generation, while lower than S&P Global’s, remains strong at $2.04 billion, reinforcing Moody’s ability to reinvest in growth, execute share buybacks, and pay dividends.
Moody’s holds an estimated 34% share of the global credit ratings market, second only to S&P Global’s 40%. While Fitch Ratings and smaller agencies compete for market share, the industry remains an effective duopoly, as investors and regulators consistently rely on Moody’s and S&P Global for trusted credit assessments. This entrenched market position creates significant barriers to entry, ensuring pricing power and long-term customer relationships. Beyond ratings, Moody’s has been expanding its presence in risk analytics, with an estimated 25% market share in the space, competing with firms like MSCI and Bloomberg. The company’s focus on enterprise software solutions and predictive analytics aligns with the growing demand for data-driven financial decision-making.
Despite its strengths, Moody’s faces competitive pressures from S&P Global’s broader service offerings, particularly in financial analytics and indices. While Moody’s has made acquisitions to strengthen its analytics division, it lacks S&P Global’s dominance in market intelligence and benchmarks. However, its specialization in credit risk and regulatory compliance continues to be a critical differentiator, attracting financial institutions seeking deep expertise in these areas.
Moody’s remains a compelling investment due to its high-margin business model, strong recurring revenue base, and growing analytics division. Its leadership in credit ratings ensures continued relevance in global finance, while its expansion into data-driven risk solutions positions it for long-term growth.
Moody’s Corporation (MCO) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 91 hedge fund portfolios held MCO at the end of the third quarter which was 67 in the previous quarter. While we acknowledge the risk and potential of MCO as an investment, our conviction lies in the belief that some 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 more promising than MCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
