Market Headwinds Weigh on Envestnet’s Revenue

Envestnet ENV finished the year with a fourth quarter that was a tad soft. Market headwinds weighed on asset-based fees that were down 15%, and the firm’s Yodlee business continues to run light. That said, wealth solutions subscription revenue growth of 10% was solid, in our view. Overall, there was little that would change our long-term view of the firm, and we will maintain our narrow economic moat rating and fair value estimate of $54 on Envestnet’s shares.

Envestnet continues to focus on the “expand” part of its “land and expand” strategy, a logical strategy given that Envestnet’s advisor count was roughly flat sequentially. Envestnet has multiple avenues to achieve this end, including through its insurance exchange which sells fee-based annuities, overlay programs such as tax and direct indexing, and a custody partnership that will allow Envestnet to earn net interest income on custodied assets. We believe that this is the right strategy but believe investors will have to be patient as these initiatives can take many years to be meaningful.

Envestnet’s data and analytics segment continues to be the firm’s weak spot with recurring revenue declining 8%. While Envestnet is seeing higher usage, we believe certain offerings are commoditized thus limiting the yield Envestnet is seeing per account. In addition, the research business, whereby Envestnet sells anonymized data to asset managers, continues to be a drag, though management is optimistic that new product launches will lead to growth in the second half of the year. However, we believe this business is competitive, and asset manager budgets may face pressure depending on market performance.