Morgan Stanley 'Not So Sure' About Gartner: Here's Why

• Gartner Inc IT shares have gained 3 percent year-to-date, remaining mostly above the $85 mark through September.
• Morgan Stanley’s Toni Kaplan initiated coverage of the company with an Equal-weight rating and a price target of $90.
• Although Gartner’s top-line growth is best-in-class, Kaplan believes that the shares already reflect this, while growth could decelerate longer term.

Gartner has generated a revenue CAGR of 12 percent over the past five years. While this is the highest in Morgan Stanley’s Analytics coverage, Toni Kaplan expresses concern regarding whether the company can “keep up the pace over time.”

Terming Gartner as a “compelling growth story near-term,” Kaplan said that the company could generate low-to-mid double-digit growth on a constant currency basis over the next four quarters. This would support the stock's premium multiple.

Kaplan added, however, that in the longer term, there are three key debates:

1. Sustainability of Gartner's Revenue Growth – The market believes it is sustainable, with Gartner growing its sales force and expanding in a vast market. The analyst expects the company to generate 14 percent c/c revenue growth in the near term, driven by continued hiring in Research sales and a strong Events schedule. However, this could decelerate to 10 percent over time on account of a slowdown in global IT spending growth, a decline in Gartner's sales force productivity and increasing competition.
2. Gartner's True TAM - The market estimates this at $58B, in-line with management’s estimate. Kaplan estimates this at $9B - $22B, which means that “there is room for near-term expansion, but future opportunities may be more limited.”
3. Gartner's Long-Term Margin Trajectory – The market believes that it is rising, backed by mix shift benefits and operating leverage. The analyst says, however, that margin could be flat on account of escalating selling costs, which would offset favorable revenue mix shift. EBITDA margins could remain broadbly unchanged through 2020.

“Gartner generates best-in-class top-line growth, but we view relative valuation as appropriate. We expect rev growth to decelerate longer term, but stay at the top of the peer group,” the Morgan Stanley report added.