MSCI Inc

MSCI's organic revenue grew 12% in the second quarter. Net new subscription sales (bookings) were $48 million versus $44 million in the year-ago quarter. MSCI raised its 2026 adjusted EBITDA expense outlook by 2% at the midpoint. The shares dropped 10% in July 21 intraday trading.

Why it matters: We attribute the negative reaction to weaker-than-expected net new subscription sales, an unfavorable change in the firm’s expense outlook, and greater-than-expected license fee compression on exchange-traded funds linked to MSCI indexes. Net new subscription sales in the index segment were $28 million, up from $20 million, while lower-profit nonindex subscription sales were $19 million, down from $24 million last year. We believe the latter missed market expectations. MSCI raised its adjusted EBITDA expense outlook by 2% at the midpoint to $1.34 billion-$1.37 billion. It raised its outlook due to targeted investment spending, its $120 million acquisition of First Street, and higher performance compensation related to the assets under management increase in licensed products. As assets in ETFs linked to MSCI indexes grew by over $400 billion in the quarter to $2.82 trillion, the firm’s exit fee rate declined 7 basis points to 2.28 basis points. We had expected a more modest 1-basis-point compression.

The bottom line: As we digest these results, we expect to lower our $620 fair value estimate for wide-moat MSCI by a low-single-digit percentage, as lower-than-expected asset-based fee rates and higher expenses are partially offset by market appreciation since our last model update. MSCI has previously said it may flex expenses depending on market conditions, so it is not surprising to us that the company is raising its expense outlook as market conditions have been constructive. We view today’s move as a market overreaction and see the shares as modestly undervalued. Importantly, the high-profit index subscription business continues to perform well.

Index segment (59% of firmwide quarterly revenue and 74% of firmwide adjusted EBITDA):

Index revenue grew 18% organically with 12% subscription revenue growth, up from 9% in the first quarter, and 27% growth in asset-based fees.

On the index subscription front, strength among hedge funds was notable. On July 6, Bloomberg reported that two Millennium trading pods made $3.7 billion in June as part of an index rebalancing strategy. Of the $28 million in net new index subscriptions, about $9 million was from hedge funds. Hedge funds now make up 10% of MSCI’s index subscription run rate, up from 8% last year. Hedge funds often launch and shut down, so sales and retention could be more volatile for MSCI’s hedge fund clients versus other client groups.

Asset-based fees grew 27%, driven by AUM growth. The firm’s fee rate on ETFs ended the quarter at 2.28 basis points (our pre-earnings expectation was 2.34 basis points) versus 2.35 basis points at the end of the first quarter and 2.41 basis points at the end of the fourth quarter. We had expected the first-quarter stepdown due to a renegotiation with BlackRock (iShares). The decline in the second quarter was driven by asset growth hitting new tiers (ETF assets ended the quarter at $2.82 trillion versus $2.40 trillion at the beginning of the quarter) and a mix toward lower-fee ETFs. Absent a market correction or a shift into higher-fee ETFs, such as emerging-market ETFs, we do not view this fee compression seen in the quarter as temporary. MSCI expects about a 0.05-basis-point step-down on Jan. 1, 2027, due to the BlackRock recontract announced on the fourth-quarter call.

Analytics (22% of revenue and 16% of EBITDA):

The analytics segment grew 7% organically, a deceleration from 11% in the first quarter, but the deceleration was entirely due to nonrecurring revenue declining by $4 million from last year. Net new subscription sales (bookings) were $11 million in the quarter, a decline from $15 million last year due to lower gross sales as retention improved. New sales bookings can be lumpy, so we wouldn’t read too much into the quarter’s decline.

Though multi-asset class analytics run rate growth slowed to 4% from 6% in the first quarter, we do see an opportunity for MSCI if the total portfolio approach gains traction among asset owners.

Sustainability and climate (11% of revenue and 7% of EBITDA):

The firm’s sustainability and climate segment continues to be weak, with organic revenue growth of 3% decelerating from 4% in the first quarter. Net new subscription sales (bookings) of $2 million were down from $5 million last year due to lower new sales and higher cancellations. MSCI also said it expects zero to slightly negative net new sales in this segment, given pressure on parts of the sustainability franchise. This is notable, as MSCI rarely provides guidance on net new subscription sales. Management continues to view the downturn in sustainability and climate products as cyclical and not secular, but we see this as more open to debate, and management admitted that the downturn here is lasting longer than expected. MSCI expects to close its acquisition of climate data and risk model provider First Street ($120 million purchase price) in the third quarter and expects this to add $10 million to its run rate.

All other (9% of revenue and 3% of EBITDA):

The all other (private assets) segment continues to be a tale of two cities. Private capital solutions (Burgiss) performed well with 16% run rate growth, and real assets (real estate) grew its run rate by just 2%. MSCI said it has shaken up management in the real estate business to improve its real estate growth rate and strategy.

MSCI’s firmwide revenue of $867 million was $4 million below the FactSet consensus estimate of $871 million. Nonrecurring revenue ($21 million in the quarter) declined by $5 million from the year-ago quarter, so this could explain the shortfall to consensus. Adjusted EBITDA of $539 million was $7 million below the FactSet consensus and adjusted earnings per share of $4.94 came in $0.05 below the consensus.

After updating our model following the firm’s release of second-quarter 2026 financial results, we are decreasing our fair value estimate for MSCI to $610 from $620. The decrease results from modeling lower asset-based license fee rates, higher near-term expenses to reflect management guidance, and softer subscription sales in the firm’s sustainability segment. This is partially offset by AUM growth in the firm’s ETF license business.

Our fair value estimate equates to about 32 times (28 times) our 2026 (2027) non-GAAP earnings estimate, which excludes the amortization of acquired intangibles. For context, this is below the firm’s five-year average of 37 times. We use an 8.3% cost of equity (up from 7.5%) and a 7.9% cost of capital (up from 7.2%) assumption in our valuation model.

During our 2026-30 forecast period, we expect revenue to grow at about a 9% compound annual rate, with higher growth in indexes relative to analytics. We still expect analytics revenue to grow, albeit more slowly than the firm overall, with more competition in the analytics business generally, pressuring segment pricing power.

With the firm’s index segment representing over 70% of the firm’s operating profit, the index segment is by far the most important segment to our fair value estimate. The index subscription business has been relatively steady, and we forecast about 9%-11% revenue growth over the next five years. While this is slightly higher than recent levels, we believe cancellations were elevated, and client conditions from 2022-24 were uniquely tough from an asset-level perspective. We expect some of the improvement from markets in 2025 to flow through in 2026.

Our growth forecast is based on pricing of 3%-4% per year, with the remaining growth driven by net new sales, and faster growth among non-asset manager segments, such as wealth managers and hedge funds. Asset-based fee revenue in indexes depends on market performance and ETF flows, which can be volatile and unpredictable. In our base case, we forecast assets in ETFs linked to MSCI indexes to grow at about 13% per year after 2026, driven by net inflows and market appreciation. We model license fee rates on asset-based fees to drop by about 4% per year during our forecast period, reflecting contract negotiations and mix shifts toward lower-fee products.

The firm’s analytics business is more competitive than its index segment, and we model growth to average about 6% over the next five years. We expect lower pricing in the Analytics business than in the index business.

For sustainability and climate, we expect more choppy trends. Sustainability and climate have seen a tough environment in the US, which we expect to continue. Management views this slowdown as cyclical rather than structural and believes that, in the future, environmental concerns and social issues (such as immigration) will become more important to the risk and return of financial assets. Overall, we are unconvinced of a rebound in this segment and model low-single-digit revenue growth during our forecast period.

Within private assets, we expect high-single-digit growth with stronger growth in private capital solutions as the segment benefits from the rise of private asset investing. That said, retention trends can be choppy in this segment.

We believe MSCI warrants a wide moat rating based on the intangible assets of its index franchise. MSCI has built a strong moat and brand with its flagship index benchmarks, notably the MSCI EAFE Index, MSCI ACWI Index, and MSCI Emerging Markets Index. MSCI monetizes its indexes in primarily three ways: subscriptions, asset-linked fees, and transaction royalties on exchange-traded futures and options.

Active asset managers pay to benchmark performance against an index. Index benchmarks are critical to asset owners, asset managers, and consultants, who often have little incentive to switch benchmarks. Once an index becomes dominant in a segment, it tends to stay that way. An asset manager may prefer to be indexed against an S&P emerging-markets index, for example, but if asset owners and consultants prefer the MSCI Emerging Markets Index, the asset manager would risk outflows. Additionally, the data subscription for active asset managers represents a small percentage of the firm’s overall cost. MSCI’s growth in the index subscription business has been at a healthy high-single-digit growth rate with management suggesting that 3%-4% of this growth is driven by price increases.

Another way MSCI monetizes its indexes' intellectual property is through passive exchange-traded and mutual funds that track them. Net inflows and market appreciation have driven strong growth in the firm’s asset-based fees. MSCI’s ETF business is largely tied to BlackRock’s iShares franchise. In 2019, BlackRock and MSCI signed a 10-year agreement with respect to licensing and announced an extension to 2035 on its fourth quarter 2025 earnings call. While the deal does include modest price reductions when certain asset tiers are hit, overall, the initial impact was less than feared.

MSCI’s fees have some relationship to an ETF’s fee ratio. As an example, we believe the license fees earned on the iShares Core MSCI EAFE ETF (expense ratio 0.07%) are meaningfully lower than the iShares MSCI EAFE ETF (expense ratio 0.32%). Even as fee rates decline, we still expect MSCI to garner a significant share of the value chain from its index franchise. By our calculations, MSCI's average fee rate on ETFs declined 2% from 2023 to 2025, which we believe is a slower decline that ETF fees.

MSCI also monetizes its index IP through the trading of options and futures of MSCI indexes. Given the outsize importance of the S&P 500 index in global equity markets (as well as the VIX), MSCI’s trading royalty revenue is significantly smaller than S&P’s, but off a smaller base, MSCI’s growth has been strong. Generally, index providers choose one exchange to be the exclusive venue of their licensed products. Because traders will go to where the index is traded, we believe the index providers have greater leverage than the exchanges. In 2007, Russell switched from CME Group to Intercontinental Exchange and then back to CME in 2017 for its index derivatives. In Asia, MSCI recently switched some of its business from the Singapore to the Hong Kong exchange. It noted on a 2020 earnings call, "We are benefiting slightly from improved economics from our exchange partners, most notably in Asia versus the prior quarter," which supports our view of the index provider’s strong negotiating position.

We view the MSCI analytics segment, which consists largely of its Barra and RiskMetrics acquisitions, as a narrow-moat business based on switching costs. The segment provides risk management, performance attribution, and portfolio management applications to asset owners and asset managers. Because MSCI analytics applications are embedded in clients’ workflows, there are switching costs, and we believe firms don’t take the decision to switch providers lightly. That said, there are competitors, such as FactSet, BlackRock’s Aladdin, Axioma (Deutsche Boerse), and Bloomberg, and we believe users can be price-sensitive for these products. Unlike in index subscriptions, where a switch to a competitor is rare (losses tend to be from a firm shutting down), analytics subscription cancelations are mixed between competitive defections and firms shutting down.

At over 10% of firmwide revenue, MSCI’s sustainability and climate data segment has been an important focus area for the firm. As an early mover and now market leader, MSCI’s ESG business boasts coverage of 14,800-plus issuers, has more than 700 climate change metrics, and covers 10,000-plus issuers. We believe that would be difficult for a competitor to match, and even so, MSCI’s long record (which could be useful in seeing how past ESG metrics have translated into performance) provides another barrier to entry. ESG-based investing has, however, faced some political backlash and underperformance issues and growth has slowed considerably. MSCI's private assets segment consists of Real Capital Analytics and Private Capital Solutions (Burgiss). Real Capital Analytics provides commercial real estate transaction and capital flows data. Burgiss provides benchmarking and performance analytics for private assets, sourcing data directly from limited partners. As this data is not public, we believe this type of unique aggregated data can form a moat. That said, with less than 10% of the firm's revenue from its private assets segment, we do not view these businesses as material enough to inform our overall moat rating.

MSCI has been a big beneficiary of the shift to passive investments, and it will particularly benefit if non-US equity markets, which have underperformed the US market, rebound sharply.

Institutional investors prefer to work with asset managers that license benchmarks aligned with their mandates; this is a substantial advantage for MSCI and should lend itself to strong pricing power, particularly as non-US equity markets have fared well recently.

With Real Capital Analytics and Burgiss, MSCI may benefit more than the market expects from the growth in private asset investing.

With the rise of passive investing, MSCI's index revenue is now more closely linked to asset-based fees, which are more cyclical in nature.

MSCI faces key customer risk, with about 10% of its revenue derived from BlackRock, which could exercise its more meaningful negotiating power to seek lower fees for index licensing. In addition, BlackRock’s technology unit (Aladdin) competes with MSCI Analytics.

Outflows, fee compression, and weak markets could make it hard for MSCI to generate new sales to active asset managers, its largest subscription client segment.