In fusion (NYSE: ENFN) is a financial software company that quietly went public last year. Like most other growth stocks, Enfusion got caught up in the market selloff and the stock is now down more than 60% from its absolute record last year. Enfusion operates as a SaaS (software as a service) company in the financial industry and provides investment management software to clients such as private equity, hedge funds and family offices. Current legacy investment management systems are highly fragmented and difficult to use, which is why the company is trying to disrupt the industry by providing a much more streamlined end-to-end solution for asset managers. After the massive drop in the share price, the company is now trading at a reduced valuation. It is a disruptor in space and grows rapidly. The TAM (total addressable market) of investment management software is significant and the company also has an attractive business model. Therefore, I think Enfusion is a buy at the current price.
The TAM for investment management software is significant, and the number of investment firms and AUMs has increased over the past few years. It also disrupts the historical market and takes market share from competitors. According to Enfusion, the global AUM grew by 40% between 2015 and 2020. It is expected to grow further at a CAGR (compound annual growth rate) of 6% to reach $145 trillion in 2025. The company’s current TAM is estimated at over $19 billion. Investment management software and IT services alone have a TAM of $11.5 billion.
It is also benefiting from the rise of alternative investment firms, which are expected to grow their assets under management at a CAGR of 8%. For example, the company recently announced that leading crypto trading firm Coinbase (COIN) has decided to integrate Enfusion’s solution into its system for cryptocurrency transactions. I am confident that these partnerships will continue to fuel growth in the future. The company is also looking to expand internationally in Asia-Pacific, Europe and Latin America, which will open up more growth opportunities in the market.
A redesigned solution
Investment management is an industry with a very complicated workflow. A lot happens behind the scenes when managers generate an order, execute a trade, or take care of administration and settlement. The landscape is becoming increasingly complex with increasing regulatory and investor requirements, demand for better accessibility and efficiency, etc. Enfusion attempts to disrupt the industry by offering a purpose-built end-to-end solution. It is capable of providing real-time analytics, accounting, portfolio management, order fulfillment management, and more.
Datasets from these departments are unified and keep the entire organization in sync. Compliance officers, merchants or executives can access specific data at any time. It is accessible anywhere, unlike legacy solutions that only allow on-site or desktop access. It also has automatic updates that meet ever-changing customer needs. Enfusion’s revamped solution is able to provide much better agility and efficiency compared to the existing solution and it is hugely successful. Its number of customers has increased by 180% from 2018 to 2021 and its churn rate is only 0.9%. I think the company will continue to take market share from its competitors because its solution has much stronger capabilities.
Finances and evaluation
Enfusion has announced its first quarter results in May. The company reported revenue of $34.1 million, up 40% year-over-year from $24.4 million. Platform subscription revenue was $31.6 million, or 92.7% of total revenue. While managed services revenue was $2.2 million, representing 6.5% of total revenue. ARR (annual recurring revenue) was $137.6 million, up 37% year-over-year. Growth is driven by its international expansion, with growth in the EMEA and APAC regions up 59% and 47% respectively. He also sees an increase in spending by existing customers, with a net dollar retention rate of 118%.
Although a high-growth stock, Enfusion already has positive adjusted EBITDA. Adjusted EBITDA for the quarter was $2.1 million, or 6.2% of total revenues. However, it shows a negative cash flow of (41) million dollars. This is largely due to the stock-based compensation charge associated with its IPO. The company achieved revenue and adjusted EBITDA of approximately $149.5 million and $18.2 million, representing revenue growth of 33.8% with an adjusted EBITDA margin of 12.2% . It ended the quarter with a very healthy balance sheet of $56.2 million in cash and just $11.9 million in debt.
Thomas Kim, CEO, on the first quarter result:
The strong results give us confidence in the long track opportunity we see in 2022. Our underlying business fundamentals remain resilient even in higher market volatility and macro uncertainty. I am delighted that we have expanded our larger client base of fund managers and institutional asset managers, as evidenced by two seven-figure fund manager wins and four additional institutional asset manager wins, and the overall acceleration of the adoption of our Order and Execution Management System (OEMS).
After the decline since its IPO, Enfusion is now trading at a very reasonable valuation. The rule of 40 is a benchmark often used to evaluate a software company. It is calculated by adding the company’s revenue growth rate and EBITDA margin to see if it is above 40. Over 40 means a company is performing well. Currently, Enfusion’s revenue growth and EBITDA margins are 40% and 6.5%, respectively. Adding them together, we get 46.5%, indicating a solid performance. If we value the company using a FWD PS ratio, it is currently trading at 4.55x 2022 revenue, which is very compelling in my opinion. As the first chart shows, its valuation is well below that of other financial software companies such as Avalara (AVLR), Intuit (INTU) and Coupa (COUP), all of which trade at a 20% premium and more. Intuit even trades almost at a premium of 100%. In the second chart, you can see that despite the cheaper valuation, it is growing at the fastest rate against its peers. It also has a huge opportunity ahead of them that will continue to fuel its growth rate. Therefore, I believe Enfusion is currently undervalued.
Enfusion is relatively immune to the macro environment, as investment management software is essential for all asset managers. However, some underlying risks remain. The company generates platform subscription revenue for access to its solutions and generates other service revenue based on the number of users, transaction volume, data usage, etc. . During an economic downturn, funds may see a decrease in clients and AUM (assets under management). ) because investors are more reluctant to invest. This will reduce revenue from the company’s services as they are mostly usage-based. If a recession occurs, there may be a huge drop in the price of all assets and some funds and companies may be liquidated, as seen in the Great Financial Crisis of 2008/2009. This will significantly reduce the number of customers using Enfusion’s solution and hurt its subscription revenue. I think the likelihood of these risks occurring is relatively low, but it is something investors should watch out for.
In conclusion, I think Enfusion has a huge opportunity in investment management software. The TAM is estimated to be over $11 billion, but Enfusion’s market capitalization is currently only around $1.2 billion. The increase in assets under management and in the number of companies and funds provides a powerful tailwind to the company. He also sees new opportunities for growth through international expansion. Its purpose-built end-to-end software is able to seamlessly integrate all workflows and deliver a much more agile and efficient solution to customers. Its revamped solution is disrupting the industry and the company is quickly onboarding customers, including companies like Coinbase. Enfusion is rapidly growing revenue while posting positive Adjusted EBITDA. Its forecast also points to continued strong growth and improved profitability. It now trades at a reduced valuation against financial software peers while growing at a faster pace. Therefore, I consider Enfusion a buy at the current price.