We would like to acknowledge Brendan Nemeth and Gables Equity for bringing the Gartner opportunity to our attention. Their extensive due diligence and ongoing support throughout our research process were invaluable in deepening our understanding of the business. For further information regarding Gables Equity's investment approach, please refer to their website linked here.
Investment Thesis
The Ratings Agency of Tech
We believe Gartner is the preeminent authority in technology research, effectively functioning as the 'ratings agency of tech' as one investor described it to us. Its unparalleled scale and market dominance, significantly exceeding Forrester's, solidify its position as the indispensable, independent source for technology buyers. Gartner's revenue of $6.2 billion dwarfs Forrester's $432.5 million; in fact, Gartner's annual revenue growth is approximately equal to Forrester's total yearly earnings. The inherent need for neutral validation in critical technology investments, coupled with the industry's tendency to consolidate around a single standard (Gartner's Magic Quadrant), creates a powerful competitive moat. This dynamic ensures Gartner's sustained growth and reinforces its leadership in a market driven by continuous technological disruption.
Gartner's research offers a powerful, yet often underappreciated, value proposition: enabling faster decision-making, driving vendor cost efficiencies, and providing crucial risk mitigation. This 'hidden' value requires skilled sales execution to resonate with C-level executives. Gartner's strategic investment in a strong, aggressive sales force acts as a catalyst, unlocking this value and driving consistent revenue growth. We view their sales capabilities as a critical asset and a key driver of future performance.
Recession Resistant Share Cannibal
Gartner's business model is a paragon of recurring revenue and financial stability. Its subscription structure, featuring multi-year contracts and upfront annual payments, provides exceptional revenue visibility. The company's pricing power of 3-7%, demonstrated by consistent annual increases, further strengthens its financial performance as Gartner has no issues covering inflation. The inherent scalability of its research, coupled with upfront payments, drives strong operating leverage and free cash flow conversion. Notably, Gartner's resilience during past economic downturns, and its evolving business mix, position it for continued stability and defensiveness, making it an ideal investment for long-term, predictable growth. The predictable and robust cash flow generated by Gartner's business model enables a consistent and increasing share buyback program, driving significant shareholder value through sustained share count reduction.
A $200 Billion Growth Opportunity
Gartner operates within a vast and significantly under-penetrated market, targeting 150,000 global enterprises with annual revenues exceeding $100 million and technology budgets of $10-50 million. This translates to a $200 billion total addressable market, segmented into $55 billion for technology solutions (GTS) and $145 billion for business solutions (GBS). Current client spending demonstrates substantial room for expansion: GTS clients average $250,000 annually, representing fewer than 0.25% of their sales and only 5 user seats compared to Gartner's recommended 5-10. Similarly, GBS clients average $200,000 annually, supporting just 4 user seats across key business functions, while the potential for penetration across these verticals remains significant. This substantial gap between current and potential client spending, combined with the large addressable market, provides a compelling runway for sustained revenue growth.
The Case for Margin Outperformance
Gartner's sales-centric business model drives its sustained growth. We believe management is deliberately managing margin expectations conservatively, leading to a significant underestimation of the company's operating leverage. The 2021 strategic shift to decouple sales headcount growth from CV growth represents a key inflection point, creating substantial potential for margin expansion. We believe the sell-side is failing to adequately model the impact of this change, particularly as CV growth accelerates towards management's medium-term guidance. This creates an opportunity for investors to capitalize on the resulting margin upside, which we ultimately believe will lead to $39 2029E FCF/Share.
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