Downgrading Wolters Kluwer and Thomson Reuters Moats to Narrow on AI Disruption Potential
We still view Thomson, RELX, and Wolters stock as undervalued, reflecting heavy pessimism about the sector.
We reviewed our moat ratings in the global technology and information services’ sectors due to potential disruption from artificial intelligence.
Why it matters: While we still think Wolters and Thomson’s moats are secure in the medium term, we are less confident on a 20-year basis, which is critical to a wide moat rating. AI is progressing rapidly, and we can’t fully discount the veracity of new entrants in healthcare and legal on a long-term horizon.
- For Wolters and Thomson, we reduce our combined Stage I and II forecast length to 15 years from 20 years and lower our Stage II earnings before interest growth to 4.5% (from 6%) and 8% (from 8.5%), respectively.
- In the near term, we expect revenue and profit growth trends to continue for both companies. Our forecast adjustments reflect higher uncertainty in the long term.
The bottom line: For Wolters and Thomson, we downgrade our moat ratings to narrow and lower our fair value estimates to EUR 120 (from EUR 150) and $140 (from $170), respectively. Additionally, we are raising our Uncertainty Ratings for Wolters, Thomson, and RELX to Medium from Low.
- Despite our fair value cuts, the shares for all three companies continue to look undervalued, reflecting heavy pessimism about the sector due to potential AI disruption.
- In the long term, we cannot fully discount the possibility that AI editorialization surpasses the performance of the current human editorialization process that supports the intangible assets and switching costs of Wolters and Thomson’s content databases in legal and healthcare.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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