What We Still Like About Moody's

What Moody's Actually Sells

Moody's is in the business of trust. When a corporation or government wants to borrow money, lenders want an independent opinion on the likelihood of getting paid back. Moody's Investors Service (MIS) provides that opinion. It is one of only three firms in the world that most bond markets accept for this purpose.

The other half of the company, Moody's Analytics (MA), sells data, software, and risk-management tools. Think of it as selling picks and shovels to the same people who buy the ratings.

In 2025, total revenue reached $7.7 billion, up about 9% from the prior year. MIS contributed $4.1 billion, or roughly 53% of the total. MA contributed $3.6 billion, the remaining 47%. Earnings rose nearly 20% to $2.46 billion.

Those are strong numbers for a company that requires very little capital to operate.

The Ratings Moat

The ratings business is one of the best business models I have ever studied. Here is why.

Regulation and convention require that most bond issuances carry ratings from recognized agencies. There are only three that matter globally: Moody's, S&P, and Fitch. Entering this market as a newcomer is close to impossible because institutional investors and regulators are accustomed to the existing three and would need decades to develop comparable trust in a new entrant.

The issuer pays for the rating, not the investor. This means Moody's gets paid whether the bond market is bullish or cautious. When bond issuance is heavy, MIS revenue surges. When issuance slows, MIS revenue dips, but the cost structure is largely people and technology, both adjustable over time.

The incremental margin on each additional rating is very high. Once the infrastructure exists, the cost of rating one more bond issue is small relative to the fee collected. This is why MIS operating margins typically run above 50%.

The Analytics Business

Moody's Analytics is a different animal. It grows more steadily than MIS because it sells subscriptions and software licenses rather than episodic transaction fees. Revenue here is more predictable, but the margins are lower, and the competition is broader. MA competes with Bloomberg, S&P Global's market intelligence arm, and a range of fintech firms.

MA has been growing in the low double digits, driven partly by acquisitions and partly by organic demand for risk-management and compliance tools. Banks, insurance companies, and asset managers need to model credit risk, and regulation keeps making this requirement more complex. Moody's benefits from that complexity.

The strategic question is whether MA can eventually become as profitable as MIS. I doubt it will reach 50% margins, but if it can sustain margins in the 30% to 35% range while growing faster than MIS, the combined business becomes more predictable and more valuable over time.

The 2025 Numbers in Context

Revenue growth of 9% and earnings growth of 20% in a single year is excellent for a mature company. But owners should understand the context. Bond issuance was strong in 2025, partly because companies refinanced debt ahead of potential interest-rate changes and partly because private credit markets pushed some borrowers back to public bond markets. If issuance normalizes or declines, MIS revenue will slow.

The earnings growth benefited from operating leverage. When revenue rises on a largely fixed cost base, profits rise faster. This works in reverse too. A year of weak issuance would compress margins, though not to alarming levels.

Valuation

At a stock price near $455 and a market capitalization around $76 billion, Moody's trades at roughly 31 times trailing earnings. That is not cheap by any historical standard. It reflects the market's recognition that this is a high-quality, capital-light business with durable competitive advantages.

The question for an owner is whether 31 times earnings is a fair price for a business that can grow earnings at 10% to 12% annually over the next decade. If it can, the math works out to acceptable long-term returns. If growth slows to 6% or 7%, the current multiple is probably too high.

I lean toward the view that Moody's can grow in the 10% range for a while longer, but I would feel more comfortable buying at a lower price. At 25 times earnings, which would imply a stock price closer to $370, the margin of safety would be more satisfying.

Risks

The most obvious risk is regulatory. Moody's and S&P were heavily criticized after the 2008 financial crisis for rating mortgage-backed securities too generously. New regulations followed. Additional regulation could increase costs or restrict pricing power, though so far the agencies have navigated each wave without lasting damage to their franchises.

A second risk is the growth of private credit markets. If more lending moves to private funds that do not require public ratings, MIS could face structural headwinds. This is a real trend, but so far it has not materially reduced demand for Moody's ratings. Many private credit transactions still use rating agency opinions for internal risk management.

A third risk is overpaying for acquisitions. Moody's has been active in buying analytics and data companies. Some of these have been good purchases. Others carry integration risk and high purchase prices. Capital allocation discipline matters here.

The Owner's View

Moody's is a business I admire greatly. The competitive position is as strong as any in financial services. The capital requirements are minimal. The growth prospects are reasonable. Management has been competent, though not flawless.

The stock price, however, asks you to pay a premium for all of those qualities. At $455, I think you are paying a fair price for a wonderful business. You are not paying a wonderful price for it. The distinction matters over time.

We hold our position and would add on a pullback of 15% or more. For someone without a position, patience here is not laziness. It is discipline.