AMK - AssetMark Is Primed For Investment In Growth And Efficiency (Upgrade)

2023-11-10 14:47:15 ET

Summary

• AssetMark Financial Holdings, Inc. has reported Q3 2023 financial results, missing revenue but beating earnings estimates.
• The company provides a wealth management platform for independent financial advisors and their clients.
• The new CEO has the opportunity to invest in growth and drive efficiencies in the organization.
• My outlook for AssetMark Financial Holdings, Inc. is a Buy at around $24.85 per share.

A Quick Take On AssetMark Holdings

AssetMark Financial Holdings, Inc. (AMK) reported its Q3 2023 financial results on November 6, 2023, missing revenue but beating consensus earnings estimates.

The firm provides a wealth management platform for independent financial advisors and their clients.

I previously wrote about AMK with a Hold outlook on falling leading economic indicators.

With revenue, operating income, and earnings trending positively, the new CEO has everything he needs to double down on investing in growth and driving efficiencies in the organization.

AssetMark Financial Holdings, Inc. appears to have a reasonable valuation compared to its peers, so my outlook for the stock in the near term is a Buy at around $24.85 per share.

AssetMark Overview And Market

Concord, California-based AssetMark was founded in 1996 to provide financial advisers with wealth management and client engagement software solutions.

Management is headed by new Chief Executive Officer Michael Kim, who has been with the firm for many years and was previously Senior Vice President Fidelity Investments, where he was "responsible for Sales Management, Relationship Management and Practice Management."

AssetMark has developed a platform that provides an end-to-end experience through nearly all parts of independent financial advisers' engagement with their clients while enabling the outsourcing of high-cost and specialty services that would otherwise require significant investments of time and money.

Various aspects of an adviser's engagement cycle that the company's platform facilitates include initial client conversation, ongoing financial planning discussions, as well as performance reporting and billing.

Additionally, the company's platform provides advisers with solutions that help them manage and optimize their day-to-day business activities.

According to a 2023 market research report by Grand View Research, the global wealth management software market was an estimated $4.3 billion in 2022 and is forecasted to reach $12.2 billion by 2030.

If achieved, this would represent a CAGR (Compound Annual Growth Rate) of 13.9% between 2023 and 2030.

The main factors driving market growth are the growing need for digital tools that can automate the wealth management process and improve the delivery of information to clients.

The chart below shows the historical and projected future growth trajectory of the U.S. Wealth Management Software Market through 2030:

Major competitors that provide or are developing wealth management solutions include:

• Envestnet

• Fiserv

• Temenos Headquarters

• Fidelity National Information Services

• Profile Software

• SS&C Technologies

• SEI Investment

• Finantix

• Comarch.

AssetMark's Recent Financial Trends

Total revenue by quarter (blue columns) has risen impressively in recent quarters; Operating income by quarter (red line) has also trended higher more recently:

Gross profit margin by quarter (green line) has remained stable at 49%; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended lower, a positive signal of increasing efficiency in this regard:

Earnings per share (Diluted) have continued to trend (unevenly) higher, as the chart shows here:

(All data in the above charts is GAAP.)

In the past 12 months, AMK's stock price has risen 2.3% vs. that of Envestnet, Inc.'s ( ENV ) fall of 33.73%, so the stock has outperformed its partial peer:

For balance sheet results, the firm ended the quarter with $231 million in cash, equivalents and short-term investments and $93.5 million in total debt, all of which was categorized as long-term.

Over the trailing twelve months, free cash flow was $201.3 million, during which capital expenditures were only $2.8 million. The company paid $16.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For AssetMark

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Envestnet:

(Source - Seeking Alpha.)

AssetMark is being valued by the market at only a slightly higher EV/Sales multiple despite strong revenue growth. Its EV/EBITDA multiple is far less on positive net income margin, suggesting the stock may be undervalued.

Commentary On AssetMark

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023's results, management's prepared remarks highlighted its efforts to drive growth through "accelerated capital deployment" by increasing CapEx spending to improve efficiencies across the company.

The firm's platform now serves in excess of 250,000 households via more than 9,300 advisors, of which 3,000 are engaged.

During the quarter, AMK produced record revenue and adjusted EBITDA margin, and management believes the company is "on track for the best year" in its history.

In the earnings call, I tracked the frequency of various terms, shown in the chart below:

The chart indicates that the firm is facing some growth headwinds, with returning to 10% organic growth a high priority for new management.

Analysts asked leadership about its growth strategies and financial management activities.

Management responded that it is implementing a three-pronged approach to re-engaging advisors organically and potentially through broader M&A opportunities and partnerships, with a goal to double its engaged advisors by 2026.

Leadership is targeting a 3-year timeline for implementing automation strategies to reduce costs.

Total revenue for Q3 2023 rose by 23.1% year-over-year, while gross profit margin improved by 0.4%.

Selling and G&A expenses as a percentage of revenue fell 2.0% YoY, and operating income increased by 36.7%, a strong result.

The company's financial position is very strong, with ample liquidity, minimal debt and impressive free cash flow.

Looking ahead, for the full year 2023, management expects platform assets to grow by 10%, revenue less cost of revenue to increase by 20% (lower end of the previous guide), and maintaining an operating expense ratio range of 15% - 17% and adjusted EBITDA of 22%.

With revenue, operating income and earnings trending positively, the new CEO has everything he needs to double down on investing in growth and driving efficiencies in the organization.

AMK appears to have a reasonable valuation compared to its peers, so my outlook for the stock in the near term is a Buy at around $24.85 per share.

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