Initiating Coverage of Clarivate With a Moat Rating of None and a $7.80 Fair Value Estimate

Senior Equity Analyst

Rob Hales

Clarivate is an information, analytics, and workflow solutions company based in the United Kingdom. It generates revenue by selling information and analytics services, which provide access to its proprietary databases and software tools. Around 80% of sales are recurring (subscription or reccuring) while the remaining 20% are one-off transaction sales of data. Clarivate’s customer base is concentrated in academia, who utilize the company’s flagship Web of Science and ProQuest One products. Other key end markets are intellectual property where Clarivate provides information on patents and trademarks, and life sciences where the company’s products assist clients with clinical trial information, regulatory approval, and commercialization.

The company has underinvested in its key products for an extended period, mainly due to its noncore status when it was part of Thomson Reuters and its subsequent private equity ownership, where cost-containment was a higher priority. As a result, the company has lost market share and is growing below current market rates. Now as a stand-alone public company, Clarivate is investing again and this should boost growth, at least back in line with the market, which the company asserts is around 5%.

Clarivate’s key strategic aims are to continue shifting customers to a subscription model, reinvesting in core products, which have lost market share, and increasing the value of its information and stickiness of its customer base by providing higher-value services beyond just data such as workflow solutions, analytics, and consulting services. We expect successful execution to be positive for the company’s moat and valuation. 

By 2026, the company aims to achieve organic revenue growth of around 5%, an EBITDA margin of about around 42.5%, free cash flow conversion of 50%, and a net debt/EBITDA ratio below 3 times.

Business Strategy & Outlook

We don’t think Clarivate has a moat. We believe some products benefit from intangible assets and switching costs, but the company, in total, lacks sufficient scale. Historically, returns on invested capital have been below the cost of capital. While we’re forecasting an improvement, we don’t expect ROICs (including goodwill) to exceed the weighted average cost of capital in our forecast. 

At first glance, Clarivate looks moatworthy. The company operates in the moaty information services industry. Key competitors we cover (RELX, Wolters Kluwer, and Thomson Reuters) all have moats. Like its peers, Clarivate has high margins, a predictable recurring revenue base with good renewal rates (about 90%), and gold-standard information products embedded in customer workflows that have been around for decades. Consequently, we do think some of Clarivate’s products benefit from intangible assets and switching costs. However, we think the main difference between Clarivate and its peers—and the reason it does not have a moat—is scale. We think scale has become even more important as the industry has evolved from providing basic information to building analytics, decision-making tools, and software workflow products based on unique content. This new focus on product development means scale is needed to be able to invest efficiently in research and development. 

Evidence of this need for scale is found in Clarivate’s business strategy. After its IPO in 2019, the company made three major acquisitions specifically to achieve scale: Decision Resources Group, CPA Global, and ProQuest. Furthermore, Clarivate’s normalized capital expenditure is high, compared with peers, at around 8% of sales. Currently, it is spending even more after a long period of underinvestment due to recent private equity ownership and previously being a noncore business at Thomson Reuters. The company’s larger peers spend around 5%, which is still a relatively high amount that is more comparable with asset-intensive companies than technology companies. In this industry, capital expenditure mainly represents product development. However, we still think investment also flows through the P&L as research and development expenses, although most companies don’t disclose this number. The one company that does is Wolters Kluwer and its R&D amounts to a sizable 10% of sales. Considering its much lower scale, Clarivate probably needs to spend more than Wolters on a relative to sales basis. Ultimately, the importance of scale due to investment intensity is evident in the numbers. These companies have high margins, with EBIT margins around 25%-35%, yet the players at scale (that is, RELX, Wolters, Thomson) only typically deliver midteen ROICs. Clarivate, which is by far the smallest of the bunch, has only a single-digit ROIC despite having the highest margins. 

With predictable revenue and margins in this industry, capital allocation and our forecasts for the invested capital base become more important in the moat assessment. Here, Clarivate’s acquisition spree has materially reduced our confidence in our forecast ROICs. By revenue, RELX is 4 times bigger than Clarivate and Wolters Kluwer is 2 times bigger. However, comparing intangible assets (the major component of invested capital besides goodwill), Clarivate is 2 times bigger than RELX and 5 times bigger than Wolters Kluwer. This odd situation arose because most of Clarivate’s intangible assets were through acquisition and have therefore been marked up to fair value. A similar, but less dramatic, picture is seen in goodwill, particularly if we add back the $4.5 billion goodwill impairment charge Clarivate took in 2022 on its ProQuest and CPA Global acquisitions. Considering the dramatic difference, perhaps Clarivate’s inflated asset base does not provide a fair picture of the company. However, even if we make generous assumptions by assuming Clarivate should have a similar invested capital/revenue ratio as RELX and Wolters and don’t add back the goodwill impairment charge, Clarivate’s ROIC at the end of our 10-year explicit forecast is only around 10%. This is a small premium to WACC, but not one that gives us confidence in a moat. Furthermore, Clarivate has a higher cost of capital and higher uncertainty due to its high leverage from taking on significant debt to fund its acquisitions. 

Academia and government is Clarivate’s biggest segment (about 50% of sales) and has the strongest moat sources, in our opinion. The segment renewal rate is said to be above the company average. Major products include Web of Science, ProQuest One, and Alma, which have renewal rates in the mid- to high 90s. Web of Science is the world’s largest curated citation database and ProQuest One is the world’s largest curated collection of research. Both of these products are mainly used in universities and have only one major competitor: Scopus for Web of Science and EBSCO for ProQuest One. We think they are intangible assets as it would be difficult and very time-consuming to build similar databases. We also see switching costs due to widespread familiarity among researchers and universities such that they have become industry standards. Alma is a workflow solution for managing library resources and offers tools for acquisitions, cataloging, and circulation, among others. Essentially, Alma is an ERP for libraries. Hence, we think it has high switching costs as it is deeply embedded in the day-to-day workflows of a library. 

Intellectual property is Clarivate’s second largest segment with a renewal rate slightly below the company average and also has products with moatworthy characteristics, such as Derwent and the patent renewal business. Derwent is a comprehensive patent information and analytics solution known for having the best proprietary patent content in the world. We think it is an intangible asset as it would be very difficult to replicate. Patent filings are unstructured (and increasingly not in English). The Derwent database has been built over decades by experts who analyze the unstructured patent filings and then add a proprietary Derwent summary on top. The patent renewals business came with CPA Global, which had a 46% EBITDA margin at acquisition. Patent renewals are mission-critical for companies, as a mistake could have a serious financial consequences and put much time and money invested in R&D at risk. Clarivate has deep relationships with global patent offices and is the only provider that guarantees the renewal will be done correctly, removing the administrative burden and a huge amount of risk, for a small fee. Consequently, we think this is a high- switching-cost business as customers are very risk averse in this area because of the potential high cost of failure. 

Life sciences is the smallest segment and least moatworthy, in our opinion. The segment renewal rate is below the company average. We surmise that means somewhere in the 80s. Markets here are the most fragmented. Still, we think some products likely benefit from switching costs, such as Dialog. Dialog, which has a 97% renewal rate, is used to manage the mission-critical steps around regulatory approval and drug safety. We think this creates switching costs as Dialog is often integrated into workflows, which leads to user familiarity and hesitance to switch in a high-risk area.

None

Economic Moat

Clarivate Plc

Clarivate Plc engages in the provision of global information, analytics and workflow solutions. It operates through the Science and Intellectual Property segments. The Science segment is composed of the academia and government, and life science and healthcare product lines. The Intellectual Property segment includes the patent, trademark, domain, and IP management product lines. The company was founded in 1864 and is headquartered in London, the United Kingdom.

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Clarivate Plc engages in the provision of global information, analytics, and workflow solutions. It operates through the following segments: Academia and Government (A&G), Intellectual Property (IP), and Life Sciences and Healthcare (LS&H). The A&G segment involves the provision of research and analytics, content aggregation, and workflow software solutions using artificial intelligence. The IP segment includes the maintenance, intelligence, and management solutions. The LS&H focuses on solutions for research and development, regulatory and safety, and commercialization. The company was founded in 1864 and is headquartered in London, the United Kingdom.

The heavy selling pressure might have exhausted for Clarivate PLC (CLVT) as it is technically in oversold territory now. In addition to this technical measure, strong agreement among Wall Street analysts in revising earnings estimates higher indicates that the stock is ripe for a trend reversal.

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