By: Robert Dickey, AIM student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Envestnet, Inc. (NYSE: ENV-US) provides
wealth management technology products and services for financial advisors and
institutional clients. The company operates through two segments: wealth
management services and data integration and intelligence (powering cloud-based
services for financial services). ENV is headquartered in Chicago, Illinois and
was founded in 1999 by CEO Judson Bergman.
•
ENV completed merger with FolioDynamix on January 2, 2018 – which was accretive
and favorable to shareholders.
•
Total revenue growth up 18% from 2016 – proving the 2015 acquisition of Yodlee
despite initial shareholder backlash.
•
Assets Under Management (AUM) accounts increasing for both client accounts and
financial advisors using the technology platform. However, ENV needs to get a
hold on costs.
•
On March 30, 2018, at 3:00pm, nine executives and officers at Envestnet each
disposed of equity in the company. This includes CEO, Chairman, and founder Jud
Bergman as well as President Bill Crager. NO CAUSE FOR ALARM.
Key points:
ENV’s
acquisition of FolioDynamix proved to create value with shareholders as stock
price climbed about 4% by the end of January 2018. FolioDynamix added trading
tools and commission and brokerage support to ENV’s current portfolio of
offerings. Technology and operations gained through acquisition will be applied
to ENV’s wealth management business, increasing operating scale and efficiency
and improving data analytic capabilities.
The
story with this company does not deal with revenues. ENV has seen total
revenues soar thanks to the Yodlee acquisition and organic growth in AUM fees. AUM
accounts with clients have grown 23% and
financial advisors using ENV’s platform have increased 11% in 2017. However, Net income has been negative
the past two years. 2017 Gross margin for ENV is 20% compared to competitors
Morningstar (MORN-US) and Cohen and Steers (CNS-US) of 55% and 48%,
respectively. The costs of revenue for ENV include compensation and benefits to
employees, which appears to be the biggest leach to this firm’s revenues.
Despite this, investors should be aware that these ratios come from GAAP
reported numbers, and ENV’s 10-K presents an adjusted net income of $60.6
million and $43.6 million for 2017 and 2016, respectively. Adjust net income
should be taken with a grain of salt – it should be examined thoroughly.
A
red flag to investors and shareholders may be when management of the company
decides to sell off their own equity stake in the company. Yes, nine officers
have disposed of portions of their stake. However, that does not make this
event inherently bad. The stock price has been on the rise for the past couple
of years, and officers in the company may be looking to harvest some of their
earnings. After all, CEO Jud Bergman still retains more than 99% of his equity
holdings prior to the disposal. Perhaps a vacation is in his future?
What has the stock done
lately?
As
mentioned earlier, the acquisition of FolioDynamix was received well by
investors and the price increased throughout January. ENV beat on earnings by
$0.01 when reports were released in February. The past three months have shown
steady returns without any major price fluctuations. On December 29, 2018, ENV
traded at $49.85. Today, March 30, 2018, the stock trades for $57.30.
Past Year Performance: When first added to the Small Cap
portfolio, the price dropped more than 20%. Price bottomed at $19.30 when the
stock was pitched at a price around $30.00. Since then, the stock has seen an
overall upside of approximately 91%. ENV has increased by 91% YTD as well after
climbing back from the price drop in 2015. Despite such a large return, the
financial analysts covering ENV still show an average upside of 7% with a price
target of $61.25. P/B for ENV is less than half of the industry average (5.11x
Vs. 12.57x), so ENV can be considered a value play for investors.
1 Year Stock
Chart vs. Benchmark (Russel 2000 Index)
Source: FactSet
My Takeaway:
After
a year of such strong growth in financial performance and stock price, it is
hard to know if there is any upside left in this company. Certainly, when an
investment yields a 91% return, an investor should consider harvesting some or
all the stake. However, the recent acquisition of FolioDynamix poses to
generate more revenues and operation efficiencies for the company. Both
companies have similar operations and should combine well to create a strong
synergy. Despite the stock price sitting around the 52-week high, I believe the
AIM Small Cap fund should continue holding its current stake in ENV to see how
this acquisition plays out. Re-evaluation should be made each quarterly
earnings report.
1 Month Stock
Chart
Source: FactSet
