We rank three FinTech companies – FactSet, IHS Markit and SS&C Technologies – from a relative risk standpoint. We also outline key long-term trends that will impact the capital markets and companies that sell into this segment of the Financial Services industry.
A few long-term trends will impact the capital markets and participant organizations. These long-term trends include: 1.) advanced automation (AI, machine learning, deep learning and more), 2.) analytics and alternative data, 3.) data storage and management, 4.) cybersecurity, and 5.) regulation. If one wished to summarize these five capital market trends the words “Automation” and “Complexity” are as good as any.
We have published numerous articles over the past several years that cover these long-term trends in detail. Feel free to search our TEK2day Website for keywords and phrases such as “Artificial Intelligence”, “Machine Learning”, “Advanced Analytics”, “CyberSecurity” and more. This article will focus on the previously mentioned companies.
FactSet Research Systems (ticker: FDS). Relative Risk: MEDIUM
FactSet’s primary business is selling proprietary data & analytics terminals to buyside and sellside investors. We don’t foresee any catalyst that will stimulate robust, long-term growth in the number of global investment professionals – i.e. “users”. Therefore, FactSet is primarily dependent upon adding a small number of users over a given period and selling incremental functionality (analytics in particular) to the installed user base.
Sure, analytics and alternative data will become a larger part of FactSet’s business over time. However, there is pressure on buyside financial institutions to reduce or hold flat the number of investment professionals. This pressure is a result of AUM fee compression as assets continue to rotate from active to passive investment products and as COVID’s long tail takes its economic toll.
Investment firms will increasingly invest in broadly-defined artificial intelligence (“AI”), to automate various workflows, including front office workflows where FactSet earns a living. FactSet can play a role in some of this effort. Investment firms will also want to build their own capability (as they do now), using advanced analytics tools and data unrelated to FactSet from firms such as SAS (private), Alteryx (ticker: AYX), Tableau/Salesforce (ticker: CRM), DataRobot and many more.
FactSet’s sellside customer cohort faces its own set of challenges including the negative downstream impact of fee compression as well as new regulations (MiFID II). These trends will reduce demand for FactSet terminals and create margin pressure.
Given these headwinds there is downside risk to street estimates and to FactSet’s present valuation of 37x EV/ 2020 Free Cash Flow and 28x EV/ 2020 EBITDA.
IHS Markit (ticker: INFO). Relative Risk: HIGH
INFO trades at approximately 40x EV/ 2020 Free Cash Flow and 20x EV/ 2020 Adjusted EBITDA. The firm is not without risk from a valuation standpoint, especially when you consider that we are more bearish than most on the U.S. and global economies given the lasting negative impact of COVID-19 combined with the fact that many consumers, companies and countries are over-levered. We expect that this economic backdrop will continue to negatively impact IHS Markit’s Transportation (automotive is the primary culprit here) and Resources segments and will eventually materialize in the Financial Services segment in a more meaningful way. We anticipate a multi-year headwind on the automotive side with our expectation that lenders will tighten consumer credit and that automotive dealers will shrink their physical footprints.
IHS Markit experienced year-over-year organic revenue declines in two of its four reporting segments – Transportation and Resources – in the May 2020 quarter. The first table below details IHS Markit’s segment Revenue and Adjusted EBITDA on an “as reported” basis. The second table details IHS Markit’s segment revenue on an organic basis and compares recurring revenue to non-recurring revenue. Non-recurring revenue – as expected – is primarily where INFO suffered revenue declines. IHS Markit took risk mitigation steps and incurred a $73.4 million restructuring charge in the quarter, primarily related to employee severance expense.
SS&C Technologies (ticker: SSNC). Relative Risk: LOW
The nature of SS&C’s core business makes it inherently less risky than FactSet and IHS Markit. Further, when one consider’s SSNC’s relative valuation to FDS and INFO it has a superior risk reward profile.
SSNC shares trade at approximately 22x and 13x EV to Free Cash Flow and EV to Adjusted EBITDA respectively (materially cheaper than FDS and INFO). Our revenue, EBITDA and free cash flow estimates for SSNC, FDS and INFO are more conservative than consensus estimates as we do not subscribe to the economic “V Recovery” theory held by many analysts and economists. Life is not linear nor are economic recoveries.
SS&C’s business does not include a significant non-recurring revenue component (perpetual license and professional services revenue accounted for 2% of March 2020 quarter revenue). The primary “at risk” revenue when considering SS&C’s business comes from delayed customer deals. Asset Managers spent a significant portion of the March and June quarters adjusting to “work from home” environments and analyzing “return to the office” scenarios. These processes undoubtedly stalled new deal signings. However, in some cases it may have helped accelerate SS&C’s outsourcing deal sales cycles. For more on the outsourcing topic check out TEK2day Podcast episode 364 Intelligent Outsourcing, where SS&C executives Scott Kurland and Kyle Fields covered this topic in detail.