Morningstar 3Q25 Thoughts

The following is the message I sent to Silver Fund with my thoughts and analysis of Morningstar's third quarter:

Morningstar reported their 3Q earnings after close today. I think it's best characterized as "more of the same", with solid fundamental performance being overshadowed by the AI conversation and commentary on their end markets being discouraging. Revenue was up 8.4% vs. our estimate of 6.8% and street of 6.2% driven mostly by the Credit businesses' 27% organic growth. Adjusted operating margin expanded by 40bps. Morningstar Direct grew 6.2% organically and Pitchbook grew 7.7% organically. That Direct number is solid (2nd highest clip across last 5 quarters) while the Pitchbook number is the weakest organic growth over the last 8 quarters. Pitchbook and Direct licenses, which are actually disclosed deep in their earnings releases, were both dead flat year over year. Overall they beat us and street on everything except Pitchbook organic growth.

The real discouraging piece, in my eyes, is that license count for both Direct and Pitchbook remain flat y/y. They attribute pitchbook's meh performance to slowness in "private equity, venture capital, and M&A related to prior-period peaks" and "elevated churn among smaller firms and corporates with non-investment use-cases." The biggest red flag from the CEO's letter is the following quote: "We are also observing extended sales cycles, due in part to firms seeking to do more with fewer resources and ongoing efforts to clarify their strategies for data and artificial intelligence." This is essentially what FactSet told us a month ago. Kunal actually dedicates more than half of his investment letter to addressing "Morningstar for the AI Era". It's an interesting read and I think very poignant for many of the discussions we're having in the fund right now (Adobe and Cloudflare come to mind immediately). Morningstar's thesis, which bodes terribly for FactSet, is essentially that data providers and platforms like Morningstar will only be as valuable as their data is proprietary in the AI era. If a bot can scrape your data on the web, which is the case for many of the pure public markets providers, then you're moat is being rapidly eroded. I think Pitchbook becomes increasingly better positioned if Kunal is right, as their data collection for Pitchbook is sourced from market participants by employees at Morningstar, a process that AI simply can't replicate yet. The Direct platform is more at risk, though. They claim that the underlying data is becoming more of a commodity but their analysis and interpretation remains proprietary and valuable to clients. To what extent this is true I'm not sure, but it's where I'll dedicate incremental work and thought when it comes to this name.

I'm comfortable holding at this stage. It's up 1.5% in the aftermarket so the market seems relatively lukewarm on the report. Would love to hear if you all feel similarly/differently.

I think this largely reflects how I feel about the quarter for my portfolio as well. There was some good and some bad, but our theses remain intact and the overhang is still very much overblown. I'm also encouraged by the activity in the aftermarket. I would actually have thought this would be down quite a bit more given the underwhelming license data and Pitchbook performance. It seems like a lot of sellers have already been purged, which helps me feel slightly more confident. It is just aftermarket trading though, and I could totally be regretting these statements when the market opens tomorrow.

I'll definitely keep holding in my portfolio, but I still don't feel comfortable taking this over that 4% weight threshold.