Moody's Strong FY Performance Faces Skepticism on Valuation and AI Risks

What happened

Moody's Corporation delivered strong FY results with 9% sales growth and 21% EPS increase, alongside expanding margins and robust free cash flow guidance for 2026. Management projects high single-digit growth in both Ratings and Analytics segments, positioning AI as an enabler due to proprietary data and client integration. However, the DeepValue master report highlights severe overvaluation, with the stock trading approximately 171% above a discounted cash flow estimate of $189 per share. This premium embeds assumptions of sustained issuance cycles and moat durability, which are challenged by cyclical risks, regulatory pressures, and emerging AI-native competitors. The report maintains a potential sell bias, emphasizing that current levels offer little margin of safety despite the company's operational strength.

Implication

Moody's impressive FY performance reinforces its high-quality, cash-generative franchise but does not address the valuation concerns highlighted in the DeepValue report. The guidance for continued growth and margin expansion is optimistic, relying on stable issuance conditions and minimal AI disruption, which may not materialize. DeepValue's sell recommendation stems from the stock's rich multiples, which discount perfect execution and ignore tail risks like regulatory shocks or competitive threats from AI-driven platforms. A downturn in debt markets or adverse regulatory actions could rapidly compress earnings and the premium multiple, exposing investors to significant downside. Therefore, while the business is resilient, entry at current levels is unattractive, and existing holders should consider trimming positions to manage risk exposure.

Thesis delta

The positive FY results and forward guidance confirm Moody's near-term operational strength but do not alter the core overvaluation thesis from the DeepValue report. Management's portrayal of AI as an enabler contrasts with the report's warning of competitive disruption, suggesting potential optimism bias in the company's narrative. Thus, the investment stance remains unchanged: Moody's is overvalued relative to its risk profile, warranting a cautious or sell approach until a material pullback provides a more favorable entry point.