ENFN - Enfusion: H2 2023 Growth Acceleration Is The Catalyst To Share Price Rerating

2023-06-20 23:55:39 ET

Summary

• I believe Enfusion is undervalued and poised for recovery, despite short-term financial challenges due to macro turmoil.
• The company's ability to sign new hedge funds and its international growth opportunities are positive indicators for future growth acceleration.
• ENFN valuation compared to expected revenue growth shows potential for closing the gap with competitors like FactSet.

Thesis

Enfusion ( ENFN ) has been hit hard by a series of churns and fund closures, but I think the worst is over and the market is beginning to price in a recovery from the trough. When it comes to ENFN, my opinion has not changed ; I still think the stock is undervalued right now. By helping investment managers make educated investment choices, the company is committed to revolutionizing the investment management industry. However, I do agree that short-term (2Q23) financials may still not be pretty due to the fact that the macro turmoil is not yet over and because I think existing customers are optimizing cost structures and delaying new purchase decisions. However, I believe what investors are currently prioritizing is the 20% growth in 1Q23 revenue and management's anticipation of further acceleration in the second half of 2023. This acceleration is crucial for meeting the full-year guidance of 25%, and I anticipate a positive re-rating of the stock if 2Q23 results are in line with guidance.

Customer adds indicative of growth recovery

Compared to the previous quarter, when ENFN signed 39 new logos, this quarter's total of 27 is a significant drop. However, I think the forward looking statements made by management are where the gem is. From the looks of it (as per management), the number of new hedge funds has increased in the first few weeks of 2Q23, which bode well for both the near- and long-term prospects of the industry. In particular, the fact that ENFN's management was able to sign a new multi-billion dollar hedge fund launch in the US and another large VC is particularly encouraging. And importantly, ENFN is well positioned to capture these big wins. Hence, if we adjust for total AUM, the effective number of adds might not have decreased (management mentioned that average size of customers has increased by 10% vs last year). If these indicators are true of the current hedge fund launch climate, I believe we could very well see growth acceleration in the coming quarters that surprises the market. Another interesting aspect about ENFN is also that most of the churn dynamics are occurring in the U.S. market, and its international exposure presents a promising growth opportunity, as evidenced by the company's 37% y/y growth in EMEA and 20% y/y growth in APAC. This might not be a key driver for the stock today, but I believe it sets ENFN well for the next 2 decades where more and more investment opportunities will arise in markets outside the US (developing countries in particular).

Growth expectations

While I am bullish on ENFN, I also see the merits to why the stock still remains at the current levels. Fact is, management guidance is based on a sharp growth acceleration in 2H23, which is backed up by talk of a comeback in new fund launches and faster implementation speed at ENFN as a result of the company's investments. If the bears were to put this bluntly, it is a big leap of faith as we are relying on management comprehension of the current trend as a potential recovery signal. In addition, it is not an uncommon news that many funds are shutting down because of the bad capital market performance. I would play devil's advocate and go one step further to say that if ENFN 2H23 acceleration is somewhat dependent on how the capital markets are going to perform. If we see another sharp derating across asset classes, it is tough to underwrite the steep acceleration at this point.

Valuation

In my opinion, today's depressed valuation reflects the market's outlook on poor near-term performance, which I believe will eventually fade once the environment improves. In that case, I believe ENFN, along with other database assets such as (FactSet), will rise with the tide. When we compare ENFN valuation vs. expected revenue growth to FactSet, we can see that ENFN is trading at a discount while expected to grow much faster. FactSet is currently trading at 8x forward revenue, and I believe ENFN will be able to close some of the gap if it continues to grow as expected. Having said that, I believe ENFN revenue growth will be sufficient to drive attractive returns even if valuations are not re-raised.

Conclusion

I maintain my view that ENFN is undervalued and poised for a recovery. While short-term financials may still be impacted by the ongoing macro turmoil, I believe the focus is now on growth acceleration in the 2H23. On this aspect, ENFN ability to sign new hedge funds and its international growth opportunities are positive indicators.

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