2023-09-12 11:54:13 ET
Summary
- I am concerned that Envestnet, Inc. financial performance in the short term might fail to meet the market's expectations.
- However, I am encouraged by management commentary regarding plans to evaluate the company's non-core businesses.
- I lower my rating for Envestnet to a Hold, after considering both the positives and negatives associated with the stock.
Elevator Pitch
I have a Hold investment rating for Envestnet, Inc. ( ENV ) stock. Previously, I wrote about an activist investor getting involved with ENV in my prior April 20, 2023 update for the company.
With this latest write-up, I downgrade my rating for Envestnet from a Buy earlier to a Hold now. On one hand, ENV's short-term outlook has become more unfavorable. On the other hand, there are corporate restructuring opportunities for Envestnet in the intermediate to long term. My Neutral opinion of ENV shares translates into a Hold rating.
Analysts Have A Dimmer View Of ENV's Near-Term Prospects
In the last few months, most of the Wall Street analysts covering Envestnet's shares cut their quarterly financial forecasts for the company. Specifically, eight of the nine sell-side analysts, who have ENV as part of their coverage universe, lowered their Q3 2023 revenue estimates for Envestnet in the past three months. During the same period, six analysts also revised their third quarter EPS projections for the stock downwards. In the recent month, the market's consensus Q3 top line and bottom line were reduced by -2.6% and -10.0%, respectively.
In my opinion, the analysts are justified in being more pessimistic about Envestnet's financial performance in the short term.
ENV's updated full-year management guidance was discouraging. In early May, the company had guided for a FY 2023 normalized EPS in the $2.11-$2.19 range. Three months later, in August, Envestnet's full-year bottom line guidance was revised lower to $2.09-$2.15 .
Envestnet had explained at its Q2 2023 earnings briefing that its full-year FY 2023 guidance "reduces our outlook for net flows and mix (for the wealth solutions business) from what we had previously expected." The company also emphasized at its most recent quarterly results call that financial advisors aren't eager to "put the money to work", because there are "fixed income kind of yields that are pretty steady." It is clear that demand for wealth solutions has been depressed by the fact that a significant proportion of investors are currently choosing to hold cash or bond-like high-yielding alternatives.
Revenue for ENV's wealth solutions segment declined by -0.2% YoY from $272.1 million in Q2 2022 to $271.6 million for Q3 2023. But the performance of the data & analytics segment was even worse, as this business' top line dropped by -12.8% from $46.9 million to $40.9 million over the same time frame.
At the company's recent second quarter results briefing, Envestnet highlighted that its data & analytics business segment suffered from "delays with bank and tech clients." The number of firms utilizing ENV's data & analytics platform only increased marginally by +1.2% QoQ from 1,851 million as of end-Q1 2023 to 1,873 million at the end of June this year.
Therefore, it is understandable that ENV's shares have underperformed on both an absolute and relative basis in recent months, as the market fears that the company's short term financial results could possibly disappoint the market. Since the beginning of May 2023, Envestnet's stock price has fallen by -18.9% , while the S&P 500 (SP500) went up by +7.0%.
In the next section of the article, I outline potential value enhancement drivers for Envestnet in the medium to long term.
Envestnet Plans To Take A Closer Look At Non-Core Businesses
As per my previous late-April article, Envestnet signed a deal with activist investor Impactive Capital in March this year, and ENV also appointed two new directors to the company's board, which included the managing partner of Impactive Capital. In that article, I noted my expectations of Impactive Capital pushing for Envestnet to engage in value-enhancing initiatives.
Interestingly, ENV mentioned at its Q2 2023 earnings call that "we continue to focus on our core strategy, while we review areas that are non-core to the business." In specific terms, Envestnet intends to zoom in on "areas" which aren't "closely aligned enough from an adjacency to be focused on" as per the company's management commentary at its most quarterly recent results briefing.
Two and a half years ago, Seeking Alpha News cited a Barron's report noting that Envestnet engaged the services of an investment bank to review its "Yodlee data aggregator unit" which included the possibility of a divestment. Taking into account the involvement of activist investor Impactive Capital and the management's recent comments, it is realistic to expect ENV to look at monetizing some of its non-core assets and businesses in the near future.
Investors are likely to respond well to any potential actions taken by Envestnet to sell non-core businesses and use the divestment proceeds for value-enhancing capital allocation options such as M&As and share repurchases.
Closing Thoughts
ENV is now trading at 20.7 times consensus forward next twelve months' normalized P/E, and this represents a significant discount to its five-year mean P/E ratio of 30.1 times (source: S&P Capital IQ ). On the negative side of things, Envestnet's valuation multiple might compress further, if its Q3 2023 and Q4 2023 results fall short of expectations. On the positive side of things, there is a good chance of a favorable re-rating of ENV's share price and valuations, if the company exits from non-core business areas. My mixed view of Envestnet's stock suggests that a Hold rating for ENV is warranted.
For further details see:
Envestnet: A Mixed View (Rating Downgrade)