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Investment overview
I wrote about Enfusion (NYSE:ENFN) previously with a buy rating as I thought the business would continue to grow, with potential for acceleration given the visible catalysts available. Notably, valuation multiples should start to reflect their true worth when the business starts to generate profits. My recommendation remains buy-rated for ENFN as the growth outlook is still very bright, supported by ENFN’s strong track record of execution.
4Q23 earnings
ENFN reported 4Q23 revenue of $46.5 million and EBITDA of $9.8 million, coming in line with consensus estimates for $45 million and $19 million, respectively. This was a fairly solid quarter, as revenue grew by 14.7%, which is an acceleration from the 13.3% seen in 3Q23 (which saw a decline from 16.9% y/y growth seen in 2Q23). Additionally, a healthy demand environment can be seen from the signing of 45 new logos in 4Q23, a step up from 37 in 3Q23 and 39 in 2Q23. Similarly, this can be seen in the growth in average contract value [ACV], which also showed improvement, growing 5.6% to $219k, an increase from $217k in 3Q23 and $212k in 2Q23. The momentum is strong with ENFN, as seen from the high bookings recorded in 4Q23 (the highest in FY23) and management noting a strong forward pipeline that continues to refill after closing deals. Regarding profitability, the outlook got better as well, with management now guiding for FY24 EBITDA margin expansion by 300 bps, which seems plausible given the momentum seen in 4Q23 (21% vs. 19% in 2/3Q23).
TAM penetration continues
ENFN is progressing very well in penetrating the large total addressable market [TAM]. In the latest analyst day, management presented a $25 billion TAM that extends well beyond hedge funds to include asset managers and alternative investment funds (such as private equity and private credit). I believe ENFN can further penetrate these other verticals, as they have demonstrated success before. For context, ENF penetrated the hedge fund vertical back in 2018, where they started with just 5 clients that have over $500K each in annual recurring revenue [ARR]. The customer profile mix back then was 4 non-equity hedge funds and 1 traditional asset manager. Through exceptional execution, in just 5 years, ENFN has grown the customer pool of >$500k ARR/customer to 51, of which 22 are non-equity hedge funds, 21 are equity hedge funds, and 8 are traditional asset managers. The amazing takeaway here is not only that ENFN has shown successful penetration but also that it has penetrated across the hedge fund space (in all sub-verticals), indicating that the ENFN product is versatile enough to meet a wide range of needs.
I think a key reason for ENFN’s success in meeting the needs of asset managers is the constant rollout of products based on what customers and prospects (even those who did not use ENFN) are saying. One of the key products highlighted during the presentation was Portfolio Workbench (launched in 2023), which I thought was a great product as it adds up market capabilities and allows PMs to adjust portfolios across multiple strategies and investment vehicles, incorporating compliance checks along the way. Given the increasing penetration of alternative asset managers, this fits really well, as they have a wider range of asset classes that require multiple strategies.
ENFN
TCO advantage should continue to drive adoption
ENFN
Aside from product improvements, I think the key driver to continuous adoption is the difference in total cost of ownership [TCO]. Many legacy products that are in use today are run on single-tenant clouds that lack the scalability of multi-tenant products. According to the analysis shown by management, ENFN is able to help customers achieve as much as a 66% TCO advantage for every on-premise system it replaces, driven by hardware, hosting, support, and maintenance. I don’t know about what others might think, but 66% cost savings is really huge, and I think ENFN should be able to easily convince prospects to switch, except those asset managers that have a system that is very integrated across multiple tech stacks (too risky). The other constraint to growth here would probably be in ENFN go-to-market strategy, and it was very encouraging to see ENFN improve streamlined implementation times, which I see as a major source of friction because it really disrupts the operational flow of clients. A shorter onboarding cycle really helps when ENFN is pitching to a customer.
ENFN
Valuation
May Investing Ideas
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- For revenue, I expect 20% growth in FY24 and 25% growth in FY25. My assumptions are the same, in that ENFN will see growth accelerate back to historical levels over time as the opportunity set is still tremendously huge, and that ENFN is still a very small part of the market. It has demonstrated its ability to accelerate growth through the quarters in FY23, and I expect it to continue this momentum (FYI FY24 revenue is based on guidance).
- For valuation, I expect ENFN to trade at 6x forward revenue. I have become more confident that ENFN will see its valuation go up in the near term as it convinces the market that its growth can accelerate. If we were to compare ENFN against the two publicly listed peers, Factset Research (FDS) and Morningstar (MORN), I believe ENFN currently trades at a discount mainly because of its lower profitability profile (FDS has a 37% EBITDA margin, while Morn has a 23% and ENFN has a 16.5%). But this can be fixed eventually as ENFN continues to scale up. For modeling sake, I assume ENFN will trade at similar levels to MORN with a slight premium because ENFN is growing faster (MONR is expected to grow revenue in the mid-teens range).
- My model suggests that ENFN should trade at ~$1.575 billion enterprise value, which translates to $12.41 share price. Based on my research and analysis, my expected target price for ENFN is $12.41.
Risk
The risk with ENFN is that growth could be lumpy, which will impact headline y/y growth figures and lead to valuation headwinds as the market stays conservative. This could easily happen if ENFN sees a large influx of large customers with a long sales cycle. Moreover, we do not know exactly how many prospects have heavily integrated systems that are hard to replace. ENFN TAM could be a lot smaller than expected.
Conclusion
I maintain a buy rating for ENFN due to its strong growth prospects and continued TAM penetration. Notably, ENFN reported solid Q4 earnings with accelerating revenue growth and a strong pipeline and given its product innovation and focus on TCO advantage, I expect it to continue successfully expanding its customer base into other subset of the asset management industry. All in all, I expect growth to accelerate from here, following momentum seen intra-quarters seen in FY23, which will drive up margins and close valuation gap vs peers.
