2023-11-16 15:05:06 ET
Summary
- P10, Inc. reported its Q3 2023 financial results, missing on revenue but beating earnings estimates.
- The company provides investment advisory services to large investors globally.
- My outlook on P10, Inc. remains Bullish due to strong fundraising, improving interest rates, and growth initiatives under new leadership.
A Quick Take On P10
P10, Inc. ( PX ) reported its Q3 2023 financial results on November 9, 2023, missing revenue but beating consensus earnings estimates.
The firm provides investment advisory services to large investors globally.
I previously wrote about PX with a Buy outlook on strong fundraising results.
Given strong fundraising results, the prospects of an improving interest rate environment, and the company's growth initiatives under newly refreshed leadership, my outlook on PX remains Bullish.
P10 Overview And market
Texas-based P10, Inc. was founded to provide advisory services to high-net-worth individuals, family offices, institutional investors and sovereign wealth funds seeking exposure to various alternative assets.
The firm is led by newly appointed CEO Luke Sarsfield, who came from a senior leadership role at Goldman Sachs, where he worked for 23 years and finished his tenure there by running the overall asset management business.
The company’s primary offerings include:
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Private Equity
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Venture Capital
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Impact Investing
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Private Credit.
The company generates revenue from recurring management and advisory fees that are mostly earned on committed capital subject to long-term lock-up agreements.
P10 seeks business relationships with a wide variety of investors through its dedicated business development and investor relationships teams.
Management is also seeking to grow through acquisitions, perhaps to add new asset class solutions to "foster deeper manager relationships."
The firm focuses its investments on middle-market and lower-middle-market companies.
According to a 2021 market research report by Deloitte, passive funds and private capital have outperformed active domestic equity and hedge funds for the period 2010 to 2019.
Notably, advisory companies expect to reduce their costs over the near term as a result of the global pandemic.
Firms will also seek to increase their investment to improve their client communication and engagement through digital means.
The research group Preqin estimates the compound annual growth rate [CAGR] for private capital AUM is expected to be 14.8% between 2021 and 2026, taking private capital AUM to $17.8 trillion.
The total AUM for major alternative asset classes tracked by Preqin is projected to reach $23.2 trillion by 2026, per the chart below:
Major competitive or other industry participants include:
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BlackRock
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Invesco
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Goldman Sachs
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Capital Group
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Oaktree Capital
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Others.
P10’s Recent Financial Trends
Total revenue by quarter (blue columns) has risen year-over-year; Operating income by quarter (red line) has fallen sequentially:
Gross profit margin by quarter (green line) has dropped precipitously; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended lower, a positive signal of improved efficiency in this regard:
Earnings per share (Diluted) have dropped markedly into negative territory:
(All data in the above charts is GAAP.)
In the past 12 months, PX’s stock price has fallen a net of 4.6%:
For balance sheet results, the firm ended the quarter with $20.0 million in cash and equivalents and $261.9 million in total debt, all of which was categorized as long-term.
Over the trailing twelve months, free cash flow was $62.1 million, during which capital expenditures were only $1.4 million. The company paid $25.7 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For P10
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 6.0 |
Enterprise Value / EBITDA | 24.5 |
Price / Sales | 4.7 |
Revenue Growth Rate | 27.7% |
Net Income Margin | -0.6% |
EBITDA % | 24.5% |
Market Capitalization | $1,120,000,000 |
Enterprise Value | $1,420,000,000 |
Operating Cash Flow | $63,540,000 |
Earnings Per Share (Fully Diluted) | $0.00 |
Forward EPS Estimate | $0.82 |
Free Cash Flow Per Share | $0.54 |
SA Quant Score | Hold - 2.67 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Based on the DCF, the firm’s shares would be valued at approximately $13.13 versus the current price of $9.54, indicating they are potentially currently undervalued.
Commentary On P10
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, P10, Inc. management’s prepared remarks highlighted exceeding its initial 2-year fundraising goal of $5 billion two quarters in advance of its goal date.
Leadership indicated it will pursue "distribution arrangements with a wide range of potential partners from retail platforms to insurance companies."
With a focus on middle-market and lower-middle-market companies, management hasn’t seen much change in the previous few quarters, although it reported "seeing strong deal flow and attractive deployment opportunities" in venture lending as "the exit of certain market participants expands [its] opportunity set."
I presume that is a reference to bankrupt Silicon Valley Bank’s parent company. The bank was a large lender to venture-backed companies.
In the earnings call, I tracked the frequency of various keywords and terms mentioned by management and analysts:
Analysts asked leadership about the value of M&A, its margin outlook for 2024 and the opportunities in private credit markets.
Management replied that it intends to balance organic and inorganic growth strategies.
Leadership maintained its margin forecast for 2023 but did not get into 2024 yet.
The firm is seeing an increase in private credit opportunities as companies shift from traditional banks to non-bank institutions. Barriers to entry for these markets is a positive.
Total revenue for Q3 2023 rose by 17.4% year-over-year, but gross profit margin dropped by 38.4%.
Selling and G&A expenses as a percentage of revenue fell by 16.1% YoY, and operating income dropped sharply on:
"higher compensation expense related to the executive transition, acquisition-related non-cash stock-based compensation and earn-out expenses related to the WTI acquisition."
The company's financial position is moderate, with some liquidity, long-term debt but strong free cash flow.
Looking ahead, forward earnings per share is expected to be $0.82, which, if achieved, would suggest the stock is currently undervalued per my discounted cash flow calculation.
A potential upside catalyst to the stock could include a dropping cost of capital environment as the U.S. economy appears to continue to slow across major metrics.
If so, the firm’s portfolio company valuations may increase, resulting in improved exit opportunities.
Given strong fundraising, the prospects of an improving rate environment and the company's growth initiatives under newly refreshed leadership, my outlook on PX remains Bullish.
For further details see:
P10 May Benefit From Easing Rates And Wider Distribution