Should Investors Still Be Buying StepStone Group (STEP)?
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StepStone Group Inc. (STEP) is a global private equity firm, providing investment solutions and advisory, as well as data services for fund performance. The company partners with its clients to develop and build private markets portfolios designed to meet the specific objectives across the private equity, infrastructure, private debt, and real estate asset classes. Its portfolios use several types of synergistic investment strategies along with third-party fund managers.
These investment strategies include commitments to funds, acquiring stakes in existing funds, and investing directly into companies. Its advisory and data services include recurring support of portfolio construction and design, discrete or project-based due diligence, advice and investment recommendations, and review of existing investments. STEP also provides its clients with tailored reporting packages, including performance benchmarks as well as associated compliance, administrative, and tax capabilities.
Since the beginning of the year, STEP advanced 4.02%, significantly underperforming its sector and the Financial Select Sector SPDR Fund (XLF) benchmark, which surged 31.99% year-to-date.
STEP’s shares reached a high of $48.81 at the beginning of September. Since then, the share declined nearly 15% and is now at a key resistance level. Today, I will analyze STEP and identify if it is still a buying opportunity at its current price.
Despite STEP’s sluggish trading lately, the company’s earnings are improving
In STEP’s 1Q2022 earnings report, the company’s top line rose 149% quarter-on-quarter to $308.6m but is down 14.03% compared to the 4Q2021, as carried interest allocations declined significantly over the period from $282.4m in the 4Q2021 to $226.3m in the 1Q2022, representing a decline of 19.88%.
This decline has impacted the company’s net income. Indeed, While STEP’s bottom line improved significantly quarter-on-quarter from a loss of $52m in the 1Q2021 to a net profit of $126.5m in the 1Q2022, revenues declined 16.33% compared to the 4Q2021.
Nevertheless, STEP has managed to significantly increase its AUM, assets under management quarter on quarter, up 36% to $89.9b, which boosted the company’s management and advisory fees by 23% to $78.06m.
The acquisition of Greenspring and the revision of earnings estimates should provide support to STEP’s share price
STEP recently completed the acquisition of Greenspring Associates, Inc. for initial cash and equity consideration of approximately $725 million. Greenspring is a dedicated venture and growth equity platform that manages $17b of total AUM and $9b of fee-earning AUM, with a strong growth and a 3-year compounded annual growth rate of 34%. This strategic acquisition will provide new opportunities for STEP, specifically in the venture capital life cycle.
The consensus of analysts is mostly neutral on STEP, with 1 buy and 3 hold recommendations out of four analysts covering the stock. The average 12-month target price for STEP stands at $46.50 per share, representing an upside of 12.3%. In addition, analysts raised earnings estimates with two estimates going higher.
In terms of valuation, STEP is trading close to its peers as of 2022e EV/Revenue, with a ratio of 4.11x, whereas SEI Investments Company (SEIC) is slightly more expensive, with a 2022e EV/Revenue of 4.21x.
Take away
Shares of STEP have been underperforming in 2021. However, I’m bullish on the stock at current levels. STEP’s financials are improving and its valuation is cheap. In turn, investors should take this decline in STEP’s price as an opportunity to add the stock to their portfolios.