Financial Engines Looks to Break Higher
We all know about the growing importance of artificial intelligence (AI) and data analytics in everyday life as computing power and AI capabilities take hold.
Nowhere is the application of AI and big data becoming more prevalent than the financial services industry. The concept of financial technology (FintTech) is disrupting the way things are done in the finance sector.
A mid-cap play in the FinTech segment that looks intriguing is Financial Engines Inc (NASDAQ:FNGN). The stock is up 38% over the past year but has gained a mere 1.63% this year, underperforming the S&P 500. It’s worth a closer look.
Financial Engines began as the brainchild of Nobel-prize-winning economist William F. Sharpe in 1986, who wanted to quantify the relationship of the risk associated with a stock.
Driven by technology, the Financial Engines platform regularly analyzes in excess of 35,000 stocks, mutual funds, ETFs, and other investment vehicles. The result is adjusted for the risk and is used in the investment decision-making process by millions of users in about 725 companies that include 150 Fortune 500 companies.
Using computers to analyze big data to arrive at a prudent investment outcome could become the new standard in the financial services sector. BlackRock, Inc. (NYSE:BLK), the largest provider of ETFs in the world, is cutting about 30% of its ETF staff and replacing them with AI. Ironically, BlackRock is the single largest holder of FNGN stock with about 11.3% of the float.
In my estimation, the use of FinTech will be a major disruptor in the finance world.
My Bull Case for FNGN Stock
Financial Engines is making a case for its popularity and will only become more important.
Revenues surged 40% to $423.94 million in 2016. The growth is expected to moderate to 14.4% and 12.8% in 2017 and 2018, respectively. This is not a concern, as growth rates generally normalize at some point as companies grow their revenues base. (Source: “Financial Engines, Inc. (FNGN),” Yahoo! Finance, last accessed October 26, 2017.)
Financial Engines is generating strong profitability highlighted by gross margins at around 60%.
The strong earnings growth is bullish for FNGN stock.
The forward five-year compound annual growth rate (CAGR) of 25% is a big improvement over the 19.25% over the trailing five years.
If Financial Engines can achieve its consensus earnings per share (EPS) for 2018, the forward multiple for FNGN stock would come in at a more attractive 20 times, compared to the 57 times the trailing EPS. The small premium to the S&P 500 is deserved and actually cheap based on a revenue growth comparison.
FNGN stock has been showing some recent momentum on the price chart, up 14% over the past month. We are seeing a bullish golden cross emerge.
The following chart shows the breakout at around $32.00 for FNGN stock in November 2016.
Chart courtesy of StockCharts.com
Financial Engines stock made an attempt to break above some tough resistance at $44.00 but was unsuccessful.
In my view, an eventual move by FNGN stock to retest $44.00 is on the horizon. Above this, if the bull case holds, we could see Financial Engines take a run at $50.00, which would expand the multiple to 32 times.
Of course, the company could deliver better results if the FinTech revolution picks up over the next few years.