Clearwater Analytics Stock: A Little-Known Fintech Play

The word is out. This past spring, America’s hottest housing market was little old Coeur d’Alene Idaho, a place we visited last year to meet with an interesting LED tech startup called Rohinni. Plenty of people are finding their own private Idaho in a state that’s known for a low crime rate, friendly people, and lots of natural beauty. It’s no surprise that this environment attracts the sort of talent needed to grow businesses, and plenty of these growth stories fly under the radar without much fanfare. One such business is Clearwater Analytics Holdings Inc. (CWAN) whose cloud-based investment accounting and analytics software is selling like hotcakes.

Bar chart showing Clearwater and Analytics' scale and organic growth. Credit: Clearwater Analytics
Credit: Clearwater Analytics

About Clearwater Analytics Stock

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When deciding which firms to write about, one thing we consider is investor interest. It’s rare we come across a stock that’s generated so little interest – at least according to the Ministry of Truth, Google. It’s a crying shame, because Boise, Idaho’s own Clearwater Analytics is a solid SaaS fintech company that’s now accessible to retail investors following their initial public offering (IPO) which has now ascribed a $4.5 billion valuation to this investment accounting and analytics firm with a software-as-aservice (SaaS) business model. The user of this platform is any business that manages assets including insurance companies, large corporations across all industries, and investment managers.

An asset management firm is what it says on the tin. It’s a company that owns assets and needs to comply with any number of accounting and regulatory requirements across multiple jurisdictions and asset class types. Clearwater meets all these needs with a single cloud-based platform.

Screenshot of the Clearwater Analytics platform
Credit: Clearwater Analytics

When managing a portfolio of assets, you’ll often need to calculate things like “value at risk” or VAR, a concept that describes the maximum losses you might incur under a worst-case scenario. To perform risk analysis properly, you need to aggregate a great deal of data and make sure it’s accurate. Clearwater calls this “the Golden Copy,” an accurate picture of millions of assets across the globe. It’s impossible to convey how useful it is for a portfolio manager to have highly configurable reporting for global investment assets daily or on-demand, instead of weekly or monthly. The Clearwater platform’s global asset class coverage includes fixed income, equities, bank loans, commercial and residential mortgages, private capital markets, derivatives, and various other alternative assets.

The value Clearwater Analytics provides as a one-stop shop for portfolio management and accounting extends outside the traditional asset manager. Other segments Clearwater targets include insurance companies and corporations managing assets internally. Below, you can see the market penetration achieved across each segment based on the trillions of dollars in assets under management (AUM) for each segment – Asset Managers ($38.1 trillion), Insurance ($12.2 trillion), and Corporations ($2.1 trillion) in North America. (We’ve excluded the 5% of Clearwater’s revenues that come from outside North America.)

Clearwater's market segment penetration. Credit: Nanalyze
Credit: Nanalyze

Clearwater makes their money through a fee that’s primarily based on the amount of assets they manage on their platform, subject to contracted minimums. No single client accounts for more than 10% of revenues and their top-10 clients represent less than 30% of total revenue. The platform covers $5.6 trillion of global invested assets for over 1,000 clients with AUM allocated as follows:

  • Insurance companies – $2.8 trillion
  • Asset managers – $1.6 trillion
  • Large corporations – $1.2 trillion

None of these clients seem eager to leave once they sign up, something that’s measured by a SaaS metric called “net retention.”

Net Retention

In our recent piece on The Best SaaS Stocks and How to Find Them, we discussed the importance of contracts which serve to keep clients from defecting in times of economic turmoil. In the absence of a contract, a SaaS offering needs to be indispensable such that clients can’t live without it. Clearwater’s offering is easy enough to cancel with a 30-day notice, which is why their net retention rate is such an important metric to monitor. At a consistent 98%, it’s exceptionally high. Once a firm has switched over to Clearwater’s solution and it becomes the backbone of their operation, it’s hard to see why they’d switch providers, especially when no other provider out there offers what Clearwater does.

The Competition

We believe that there are currently no competitors who offer a cloud-native platform like ours. 

Credit: Clearwater Analytics

That’s probably because historically, clients haven’t felt comfortable putting their most important data in “the cloud,” opting instead for DIY solutions or third-party offerings which live on internal servers. It seems like Clearwater has been able to successfully handle these objections and convince clients that cloud-based offerings are the way forward. Their ability to capture so much TAM from corporations leads us to believe they’re the least resistant when it comes to adopting cloud solutions. Asset managers may prove to be a different story.

Financial services provider MSCI (MSCI) fought this battle with clients trying to get them to migrate off a dreadful legacy product – Aegis, the Bloomberg terminal of equities risk management – onto a new multi-asset class cloud-based platform hosted by MSCI. Many institutional investors dodn’t want their portfolios stored in the cloud for any number of reasons. One wonders if this helps explain the low penetration Clearwater has in the asset management industry, though they’ve landed some great reference clients including Goldman Sachs, JP Morgan, and Morgan Stanley.

Competitors they list include solutions offered by asset managers like Blackrock (Aladdin) and State Street (PAM). It’s understandable why asset managers would prefer a solution offered by a technology company instead of a competitor.

Clearwater describes the market they operate in as competitive and highly fragmented. A variety of providers target various segments and asset types which usually means cobbling together a solution.

Should You Buy Clearwater Analytics Stock?

People often ask Google if they should buy a stock, which is really no different from asking a random person. The answer is always unique to what each individual already holds, their tolerance for risk, and the type of exposure they’re looking for.

In the same way that Clearwater Analytics aggregates their clients’ portfolios of assets, we aggregate our own to provide a complete picture of our investment exposure. One stock we’re presently holding in our dividend growth investing portfolio is Franklin Templeton (BEN), a company that also makes its living based on AUM-based fees.

Both these companies charge fees based on the amount of assets being covered by their platform, and both would be sensitive to an economic downturn where the amount of assets they’re managing might decrease. Even with a 98% retention rate and “contract minimums,” Clearwater Analytics could still see their run rate drop if the amount of assets their clients are holding drops. The company assures us that because 77% of the assets on their platform are high-grade fixed income securities and structured products, this won’t be a problem.

Because a substantial majority of the assets on our platform have very low levels of volatility with respect to their market value, the growth in annualized recurring revenue is generally not attributable to the fluctuating market value of the assets on our platform. 

Credit: Clearwater Analytics

As we’ve talked about before, we prefer SaaS stocks that cross multiple industries, where Clearwater’s solution is specific to the finance industry. The company talks about an “80% win rate for new clients over the prior four years in deals that reached the proposal stage,” but how many deals aren’t making it past the discovery stage once clients realize it’s a cloud-based platform? We like the stock, but not enough to hold it in our own portfolio.

For those who want to pull the trigger on some CWAN stock, it’s definitely not overvalued based on our simple valuation ratio.

  • Market cap / annualized revenues
    $4,500 / 235.54 = 19

Here’s the same ratio for a handful of SaaS companies taken from our tech stock catalog.

CategoryCompanyValuation Ratio
ComputingSnowflake Inc79
ComputingSentinelOne 71
ComputingCrowdStrike41
Artificial IntelligenceUiPath39
Artificial IntelligenceSchrodinger35
Artificial IntelligencePalantir32
FintechDocuSign28
IoTProcore25
IoTC324
ComputingKnowBe418
Artificial IntelligenceSplunk10
Artificial IntelligenceAlteryx10
Artificial IntelligenceSumo Logic9

Conclusion

SaaS companies that provide a service that becomes critical when adopted will be more resilient in times of economic turmoil. Clearwater’s high net retention rate shows investment professionals aren’t likely to switch platforms, and the high percentage of fixed income products – at least for now – helps reduce revenue volatility during a crisis. The question becomes whether the company can continue growing as fast as they have been once the low-hanging fruit gets picked.

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