Enfusion: Modernizing Investment, Yet I Am Not Investing
Summary
- Enfusion modernizes investment management.
- The company has seen solid traction, and investors have priced in this momentum quite aggressively, too aggressively to my taste.
- Given the dynamics mentioned above, I fail to see appeal here at high valuations.
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Enfusion (NYSE:ENFN) has seen a solid public debut with shares priced at the high end of the preliminary range, followed by solid first days of trading action as shares have settled in the low twenties. The company aims to modernize investment management operations and has found real commercial success while trying to do so. Despite the commercial traction and positive debut in the stock market, I fail to see appeal at a 20 times sales multiple here.
Investment Management Operations
Enfusion is a flexible and modern framework for investment management. The company was founded nearly a quarter of a century ago when two Chicago developers tied up and started a financial consulting agency.
They experienced firsthand how fragmented systems were, resulting in inefficiencies, security issues and underutilization of critical data, among others. To tie-up all the information streams, the company was set up as cloud-based operations, far before it was common practice to do so.
With faster implementation, updates and none of the on-premise struggles, the company has grown rapidly to the point at which it now serves 635 investment management firms. These customers are serviced by approximately the same number of employees, as the company has expanded to Europe and the wider Asian region as well after launching the flagship product in 2006.
Clients are attracted to the purpose designed system which relies on a single dataset, allowing clients to see and interact with all aspects which include portfolio construction, trading, risk management, accounting among others.
Valuation & IPO Thoughts
Management and underwriters of Enfusion aimed to sell 18.75 million shares in a preliminary share price between $15 and $17 per share, with pricing set at the high end of the preliminary offering price. Note that 15.3 million shares were sold by the company and a minority of the offering comprised the selling of shares by existing shareholders, with the company raising $260 million in gross proceeds with the offering in the process.
With a total of 113.1 million shares outstanding following the offering, the company has been awarded a $1.92 billion equity valuation. This valuation includes a net cash position of around $90 million, which implies that operating assets are valued at around $1.83 billion.
Looking at the actual operations we see a business which generated $59 million in revenues in 2019 on which a near $14 million operating profit was reported, comforting margins by all means. Revenues were up nearly 35% in 2020 to nearly $80 million, yet higher general and administrative expenses meant that operating profits were more than cut in half to $6 million.
If we look at the reported numbers for the first half of the year, revenues just surpassed the $50 million number, up 37% on the year before. Operating profits of $11.7 million were more or less equal to the same period in the first half of last year.
If we annualize these numbers, we have a business with just over a hundred million in sales and operating profits of $23 million. Given the strong balance sheet, the business should be able to post net profits of $18 million, just above $0.15 per share. This results in steep valuations at 100 times earnings and approximately 18 times sales.
Worrisome, the pro forma numbers reveal similar revenue numbers for the first half of the year, but operating profits of $11.7 million fall to just $1.6 million, as it is unclear to me if this margin pressure is lasting post the offering as well. This pressure on profit causes even more concern about the valuation, as that is even more the case as shares have risen to $20 and change here. This move has added $400 million to the valuation, for a $2.2 billion enterprise valuation, quite steep, and in fact too steep for me.
If we look at the underlying business, the $100 million revenue run rate implies that the subscription does not come cheap, with average revenues per customers trending around $150K at this point in time.
Concluding Remarks
Other than the valuation risk, which is the biggest risk in my eyes, there are some other concerns. Key other concerns relate to the competitiveness of the product, in an industry which is rapidly transforming as well, as well as the general condition of financial markets which now trade around all-time highs.
Despite the long-term potential, as SaaS names in the financial industry fetch quite high valuations, I fail to see great appeal. A roughly 20 times sales multiples in combination with 30-40% growth looks quite steep, but on the other hand, the company is already profitable (although the pro forma numbers are not exactly known to me).
Right here and now I fail to see imminent appeal, as I start coverage on the name with a neutral to cautious stance here.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.