Businesses that exist at the intersection of finance and technology hold tremendous promise for investors. These are massive markets, and the winners in this space are likely to create tremendous value for their customers and shareholders alike.
The challenge, of course, is determining which companies will emerge -- and remain -- as the leaders in this dynamic arena. Those that do prevail will possess strong competitive advantages, including best-in-class technology along with a clear customer-value proposition. And if they're to deliver strong returns to investors, they'll need to be able to grow at above-market rates for a long time.
Fortunately, we can invest in one such business today. Read on to learn more about it.
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Envestnet (ENV -1.33%) is a leading provider of cloud-based wealth-management software for financial advisors. The company currently serves 57,500 advisors, who, in turn, manage 6.5 million accounts and $1.2 trillion in investable assets. Yet it has long runways for growth still ahead, as Envestnet estimates its total addressable market to span across 264,000 advisors and more than $12 trillion in total assets.
Envestnet's competitive advantage resides not only in the quality of its technology, but also in the seamless integration of its products. In fact, Envestnet is striving to become a one-stop shop for wealth-management professionals and has made significant progress in this regard, with offerings that include financial planning, investment research, trading, portfolio rebalancing, performance reporting, billing, and customer-relationship management software, among other services.
Envestnet's platform helps its clients achieve two powerful benefits: time and money. According to the company, investment advisors using integrated technology spend significantly less time on administrative tasks. In turn, they're able to serve 57% more clients and generate 46% more revenue, on average. Perhaps unsurprisingly, these benefits have resulted in outstanding customer-retention rates for Envestnet, which are typically above 95%.
Widening the moat
To provide even more value to its users -- and further strengthen its competitive position -- Envestnet likes to acquire businesses with leading technologies in areas adjacent to its core competencies and integrate them into its product suite. It's been a successful strategy, and Envestnet's largest acquisition to date -- Yodlee -- is proving to be its best purchase yet.
After initially getting hit hard when the $500+ million deal was first announced in August 2015, Envestnet's shares have since rallied nearly 70%. Investors are beginning to see the potential in Yodlee's best-in-class data-aggregation technology, and rightfully so. Yodlee helps advisors see all of their clients' assets, even those they do not manage directly.
This ability to see a client's complete financial picture is becoming a necessity, as the wealth-management industry moves steadily toward a fiduciary standard in which financial advisors are required to act in their clients' best interests. And with the regulatory environment likely to become only more burdensome for wealth-management professionals in the years ahead, Yodlee's technology should continue to grow in importance.
Strong growth at a reasonable price
With its value proposition well secured, Envestnet's growth should continue to impress. From 2011 to 2016, the number of advisors the company serves increased by 23% annually, which helped fuel a 36% annualized increase in revenue during that time.
Looking ahead, Envestnet expects to generate long-term organic revenue growth of 13% to 17%. Earnings should rise even faster, as the company's capital-light model is highly scalable: It requires little incremental expense for Envestnet to add new customers to its platform, so profit margins tend to improve over time. Wall Street seems to agree, with analysts projecting that Envestnet will grow its earnings per share at an annualized rate of 20% over the next half-decade.
Investors would likely expect to pay a pretty penny for such a high-growth and competitively advantaged company, but Envestnet's stock, while richly priced, is not unreasonably valued. Shares can currently be had at a forward price-to-earnings ratio of less than 30 -- a fair price to pay considering the quality of Envestnet's business and its tremendous long-term growth prospects. As such, investors may wish to integrate some of this FinTech company's shares into their own diversified portfolios.
