Capital Markets Information Services: Reviewing Our Moats for the Rise of AI

Amid the possibility of generative artificial intelligence disrupting many industries, we reviewed the moat ratings for an array of capital markets information services stocks, including Broadridge, Clearwater, FactSet, Fair Isaac, Moody’s, MSCI, S&P Global, SS&C, and Verisk.

Why it matters: Generative AI is affecting these firms through many vectors, adding a degree of uncertainty that demands careful consideration. Generative AI lowers barriers to entry in the compilation of nonproprietary data and creation of software, which may now require more investment spending, changing the investing landscape.

• Overall, we do not expect generative AI to disrupt network effect-based moats. Credit ratings, financial and commodity indexes, and credit scores are data-driven benchmarks that are embedded throughout their respective industries.
• Another theme is that proprietary data often protects a firm’s moat. Examples include credit ratings (credit ratings are based on nonpublic information provided by management teams) and Verisk’s contributory insurance data on claims and insurance losses.

The bottom line: After considering factors such as competitive positioning, pricing models, and the prevalence of proprietary data, we are maintaining our wide moat ratings for Broadridge, Fair Isaac, Moody’s, MSCI, S&P Global, and Verisk.

• We are maintaining our narrow moat rating for Clearwater.
• We downgraded our moat ratings to none from narrow for FactSet and SS&C.

Between the lines: Market fears related to AI-related headwinds tie to long-term growth and terminal values, in our view. As a result, strong current performance and confident management commentary may not assuage investor fears.

• AI may not be a net negative if it increases data usage, as AI makes it easier to analyze data. S&P Global recently mentioned that it had 80 clients for a model context protocol mostly related to the firm’s market intelligence segment, for example.