AMK - AssetMark Financial Holdings: Increasing Assets Under Management A Stock To Buy

Summary

• AMK’s business model is based on a platform for financial advisors.
• Its revenue growth has been impressive for the past three years.
• The number of assets managed on AMK's platform has increased by 71% from Dec. 31, 2018, to Dec. 31, 2021.
• The market shift from traditional brokerages to registered investment advisors serves as the basis for AMK's growth. I rate it a buy.

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AssetMark Financial Holdings (AMK) has been performing well over the past year and is well positioned to capitalize on the industry shift from traditional brokerage firms to independent registered investment advisors (RIAs). Wealth management is a growing industry, and is required by both businesses and individuals during a crisis like a recession and the Fed's quantitative tightening. As per the company's annual filing in 2021 , assets under management increased from $38.2 billion in 2018 to $84.5 billion in 2020. Revenue also increased from $168.7 million in 2018 to $315.5 million in 2020, demonstrating the expansion and profitability of AMK. Its expansion has been fueled by a combination of bringing on new advisors, gaining clients, and existing advisors taking home more money.

What Does the Company Do?

AssetMark Financial Holdings specializes in providing extensive wealth management and technology solutions that power independent financial advisors and their clients. The company's tech-based platform supports businesses by increasing client engagement and business growth, with an aim to save the two most important assets of any business: time and money. Major attractions like extensive and scalable value-added services as well as curated investment solutions have been key drivers of AMK's market share expansion from 10% to 11% from Dec. 31, 2018, to Sept. 30, 2021.

Financial Performance

Looking at the longer-term revenue growth of the firm, it has been growing at 20.12% YoY, which is 4x better than the sector median growth of 4.63%. While net income has grown at a phenomenal 105.75% growth rate for the past three years, it spiked up a whopping 2,505.47% for the last fiscal year. These numbers show higher growth potential in the company's business model and main product - their terminal for financial advisors. At a time when the threat of recession looms all over the world, financial advisors and their clients need assistance from such platforms more than ever. This sets up to be a growth driver for AMK.

Some of the major reasons for such exceptional performances can be found in their income statements. Operating cash flow growth has been 12.22% YoY, a 2,080.74% difference over the sector median of 0.56%. Another major area of growth is diluted EPS, which has grown 100.05% for the past three fiscal years and 2,375.08% for the past fiscal year.

Strengths

The core strength of AMK lies in its platform for industry professionals. It comes with fully integrated technology to provide advisors with highly experienced consulting and service support. Apart from technological advancements, the platform also narrows down potential investment solutions for advisors from a wide range of options, including a team of skilled investment professionals acting as a virtual extension of their investment staff.

Asset growth has been strong for three consecutive years, at a staggering 71% for Dec. 31, 2018, to Dec. 31, 2021. $11.1 billion assets were added to the platform from new advisors, and $5.9 billion were acquired from competitors over the same time period.

Earnings per share for AMK have been increasing for the past fiscal year with a surprise every quarter, as seen in the chart below. On a YoY basis, this financial services company is expected to have an EPS of $1.73 per share for FY 2022, a 23.6% gain from the previous year. Future growth consensus for EPS is growing at a steady average rate of 19%, which shows a bullish sentiment among analysts.

Weakness

One of the factors likely causing some investors to pull away from AMK is its negative stock price return for the past three years of -17.36%. Another factor is its current ratio, which stands at 3.72 - too high for any company, as it gives the impression of improper utilization of the firm's assets. It also indicates that they might face difficulties in paying off their short-term debt, which is never a good sign.

The rising demand for financial services platforms and consulting for finance professionals as well as individuals was enhanced as a result of quantitative tightening by the U.S. Federal Reserve. This demand might peak in the coming quarters or years should the current chaotic market conditions return to normal. If the advisory industry suffers a downturn due to reduced demand, it will directly impact the growth of AMK.

Another concern is the dependency of revenue on fees from advisors using the platform. At this stage of its growth, AMK essentially has just one component and target audience for its business.

Forward Outlook

AssetMark is well-positioned to capitalize on the $375 billion business opportunity in the financial services industry in various sectors: retirement planning, commission-based assets, and advisory services.

The company has AssetMark Retirement Services in place to capitalize on a $56 billion market segment of retirement advisory services. Although there is no direct support to commission-based assets on AMK's platform, which has a $174 billion opportunity, these are still included and counted in the "fee" section of revenue. One of the biggest market segments is advisory, with a whopping value of $145 billion. To capitalize on this segment, AssetMark just finished acquiring Adhesion, a leading provider of investment management solutions for RIAs.

The valuations are performed based on two methods: P/E-based and EV/EBITDA- based. The sector median EV/EBITDA multiple is 12.46, whereas AMK's multiple outperforms the sector by 20%, standing at 15.22. The stock is trading near the calculated fair value (as of Feb. 18, 2023), but it tends to gain more once market growth is factored in.

Conclusions

Strong revenue growth and financials support a firm growth outlook for AMK in the long run. The business model is based on fees and the company's actions serve their interests well. As of year-end 2020, advisors managed $25.7 trillion in assets with a 9.3% CAGR for five years ending in FY 2020 on the company's platform. The acquisition of Adhesion was a major step toward capitalizing on the growing financial advisory market. The stock has a strong base business, and will have a strong presence in a growth industry over at least the next one to two years. I rate AMK a buy on a long-term basis.

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