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Elevator Pitch
I continue to assign a Buy investment rating to Envestnet (NYSE:ENV) shares.
My previous November 21, 2023 write-up drew attention to ENV’s favorable corporate developments. I assess Envestnet’s most recent quarterly financial performance with this latest article.
Envestnet recorded an impressive +23% bottom line beat for Q4 2023. The company’s guidance points to a positive outlook for ENV in Q1 2024 and full-year 2024. Furthermore, Envestnet’s actual 2024 results might be a positive surprise, assuming that its custody services offering gains traction. My Buy rating for ENV stays unchanged following an evaluation of the company’s performance and prospects.
Latest Quarterly Results Were Better Than Consensus Projections
Both ENV’s top line and bottom line for the fourth quarter of 2023 beat Wall Street’s expectations.
The company’s revenue rose by +8% YoY to $317.6 million in Q4 2023 as disclosed in its results announcement released on February 22, 2024 after trading hours. This was equivalent to a +2% top line beat, as the market’s consensus revenue estimate was lower at $311.7 million.
In Q4 2023, a +11% YoY expansion in revenue derived from the Wealth Solutions segment more than offset a -7% YoY contraction in top line contributed by the Data & Analytics segment as indicated in its results presentation slides. Envestnet revealed at its Q4 2023 earnings call that its Wealth Solutions segment’s fourth quarter top line performance was boosted by positive “net inflows” into “AUM/A (Assets Under Management or Administration) accounts” in the recent quarter. On the flip side, ENV mentioned at the company’s fourth quarter earnings briefing that its Data & Analytics segment’s recent results were affected by headwinds “in the banking channel and with FinTech clients” which are expected to ease in 2024.
Envestnet achieved a substantial +23% bottom line beat in the latest quarter, as its Q4 2023 non-GAAP adjusted EPS of $0.65 was significantly higher than the sell side analysts’ consensus bottom line forecast of $0.53 per share. It is also worth highlighting that ENV’s normalized EPS grew by +44% YoY for the most recent quarter.
ENV’s better-than-expected earnings for Q4 2023 were the result of both top line growth (highlighted above) and profitability improvement. The company’s normalized EBITDA margin improved significantly from 18% for Q4 2022 to 24% in Q4 2023, which was also superior to the sell side’s consensus EBITDA margin projection of 21% (source: S&P Capital IQ). Earlier, I noted in my November 21, 2023 article that I anticipated that “a decline in investments and good expense optimization” will be positive factors for Envestnet’s bottom line expansion in 2023, which has come into fruition. At its recent quarterly results briefing, the company credited its margin improvement to a $60 million decrease in its yearly “expense run rate” for last year.
First Quarter Guidance Is Within Expectations
Envestnet’s near-term financial prospects are reasonably good.
ENV had issued its management guidance for the first quarter of 2024 in tandem with its Q4 2023 earnings disclosure. In specific terms, Envestnet is anticipating that it will register Q1 2024 revenue and normalized EPS in the $320-$326 million and $0.52-$0.57 ranges, respectively.
Before Envestnet announced its Q4 2023 results, the market was expecting a revenue of $326 million and a non-GAAP adjusted EPS of $0.55 (source: S&P Capital IQ) for the company in Q1 2024. As such, ENV’s Q1 2024 guidance has met the market’s expectations.
The mid-point of the company’s Q1 2024 financial guidance implies that Envestnet’s top line and bottom line are projected to expand by +8% YoY and +18% YoY, respectively, in the first quarter of this year.
Looking beyond the first quarter, ENV didn’t provide complete full-year FY 2024 financial guidance. But Envestnet did indicate at its Q4 2023 earnings briefing that it sees its Wealth Solutions segment delivering a “mid to high single digit” increase in revenue for this year, which is better than +3% top line growth that this segment achieved in full-year FY 2023. At the company’s latest quarterly earnings call, ENV also outlined its expectations of a further improvement in EBITDA margin for FY 2024.
I am of the view that the favorable Q1 2024 and FY 2024 outlook for Envestnet is realistic.
AUM/A growth and cost control were the main drivers of ENV’s Q4 2023 earnings beat, and I expect that these two company-specific factors will continue to be supportive of Envestnet’s financial performance this year. There are also external tailwinds, as potential rate cuts could prompt investors to reallocate capital from cash to fixed income or equities that carry higher fees for ENV.
Custody Services Could Offer Positive Surprises Relating To 2024 Performance
I previously highlighted in my November 2023 write-up that “custody services might be a new revenue expansion driver for ENV with the company leveraging on its partnership with FNZ.” FNZ calls itself a provider of “a global, end-to-end wealth management platform” on its website.
At the company’s recent fourth quarter results briefing, Envestnet emphasized that the collaboration with FNZ could offer “upside on the top line guidance” with the company targeting to introduce its custody services offering to the market this year.
In other words, there is a good chance that ENV can surprise investors in a positive manner with its FY 2024 performance, just like how its Q4 2023 results surpassed expectations.
Closing Thoughts
Envestnet’s Q4 2023 financial results were excellent, and the company’s Q1 2024 guidance is pretty decent. Notwithstanding the outstanding quarterly financial performance and the positive financial prospects, ENV’s shares are still undervalued. Envestnet’s Price-to-Earnings Growth or PEG multiple is 0.73 times (or under 1 times that implies fair valuation) as per the company’s consensus FY 2024-2025 normalized EPS CAGR forecast of +25.6% and the stock’s consensus FY 2024 normalized P/E ratio of 18.8 times (source: S&P Capital IQ).
