I’m taking a look at MSCI stock. It’s an interesting one and pretty easy to understand. The bulk of the business is a subscription revenue tied to the indices MSCI creates. These indices are then used by asset managers for their benchmarks. It’s kind of funny how similar it seems to a SAAS stock.
MSCI’s business is growing well (though not gangbusters) which you can see below and ~97% of it is tied to recurring subscriptions. The thing that sticks out to me is the EBITDA margins! In total, the company has ~55% EBITDA margins. If you were to just take the Index business they have, that segment is >70% EBITDA margins.
Given capex is so low, this results in a ton of FCF. MSCI can’t really invest it all back into the business, so they pay a reasonable dividend and do share repurchases. They also have levered the balance sheet ~3.5x to juice returns, which makes since on a highly recurring business.
The table below shows how much in share repurchases + dividends MSCI has done. I also put the market cap at the end of the year for context. Obviously, buying MSCI would’ve been a great call back in 2015. But also just look at how much capital has been returned. It’s around $4BN and if you bought at the end of 2015, that’d be nearly ~60% of your capital back.
Why does that make me bullish on SAAS stocks?
For one, its still early days. And as these names get scale on their costs, I think they too will be generating a significant amount of FCF (some already do, but I think it will be higher).
Some names will eventually reach a “maturity” point. Take Dropbox for example, which I did a post on recently. Arguably, they are reaching maturity and their margins are exceptional, as is the FCF.
If you made it to the end of my Dropbox post, you would’ve seen some analysis I did for long-term margin potential which I’ll repost here (saved you a click). This is a template I typically use to evaluate SAAS names. In some cases, like for ServiceNow, I arrive at “mature” operating margins of near 50%. The main reason is that the typical first sign up is actually negative margin, but the following renewal is very high margin (i.e. lots of costs in to win your business, then I just need to keep you).
Fast forward ten years: Some SAAS stocks will still be plowing every dollar back into the business. Some will still be very nascent and growing quickly, but not have much earnings. Some SAAS stocks will be more mature, be willing to take on debt like MSCI, and will likely gobble up shares and pay dividends.
Remember when Apple shifted to this strategy after generating so much cash? That makes me excited.
