Envestnet Corp.: An Envestnet for the Long Run

Elliot Turner presented his in-depth investment thesis on Envestnet Corp. (NYSE: ENV) at Wide-Moat Investing Summit 2016.

Envestnet Corp. strives to be investment advisors’ chosen platform for technology-based solutions, combining three distinct business lines into one holistic platform. This company is well positioned for the transitions in client preferences and the regulatory regime in the wake of the financial crisis. An industry-wide fiduciary standard would be a major tailwind. Envestnet has two longer-standing businesses: its AUM/A business and its Tamarac software platform. More recently, the company acquired a third: Yodlee, for data aggregation. The AUM/A business is the largest segment, generating 80% of revenue prior to the Yodlee acquisition; now ~60%. We like this business because it is sticky, the allocation is diverse and stylistically agnostic, and the long-term growth profile approximates the 60/40 portfolio plus the household savings rate. As such, when it does reach a terminal growth state, its terminal growth should be faster than GDP, a rarity. Tamarac is a practice management and reporting platform for advisors that includes reporting, billing, rebalancing and other practical needs. Retention rates are between 97-98%, as advisors build their entire workflow around the platform, the learning curve is steep and the data accumulates exponentially over time. Their primary competitor was recently bought out for 18x EV/estimated EBITDA, with the rich multiple reflecting the high-margin nature of the business and the extended pipeline of growth. When Envestnet bought Yodlee, their 3rd line of business, the stock collapsed and created the present opportunity. Yodlee has built the premier platform for financial account aggregation, and Envestnet sees an opportunity to cross-sell these service and data to advisors. The stock dropped at the time for three main reasons: investor skepticism about a new line of business; Envestnet’s downgrading of its long-term revenue growth target from 20+% to the high teens; and merger arb trades as this was a partly stock-based transaction. In effect, the entire cost of Yodlee, plus some, was subtracted from Envestnet’s valuation, leaving the stock far too cheap for such a sticky business with a long growth runway.

About the instructor:

Elliot Turner is a managing director at RGA Investment Advisors, LLC. Prior to joining RGA, Elliot was a principal and managing director at AustinWeston Asset Management LLC, a value-driven investment management firm, where he specialized in discovering and analyzing long-term investment opportunities and strategic portfolio management. Elliot holds a Juris Doctor from Brooklyn Law School, and is admitted to practice law in New York State. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.