Alternatives Expansion And Outsourcing Demand Will Drive Powerful Long Term Upside Potential

Catalysts

About SEI Investments

SEI Investments provides integrated technology, operations outsourcing and investment solutions to financial institutions, advisers and asset managers globally.

What are the underlying business or industry changes driving this perspective?

• Surging demand for outsourcing among alternative asset managers, including large private credit and alternatives platforms that are shifting from insourcing to outsourcing, is driving record IMS sales and may support sustained double digit revenue growth and operating leverage as invested capital based fee pools scale.
• The rapid expansion of alternatives and CIT structures across the U.S. and EMEA, where SEI already has diversified, high end clients and strong referenceability, is increasing assets under administration and mix shifting revenue toward higher margin segments that may lift consolidated operating margins.
• The Stratos partnership is increasing SEI’s visibility and distribution in the advisor and RIA channels, which could influence net inflows, integrated cash program balances and earnings trends as incremental revenue drops through at attractive margins.
• Large, multi year digital transformation wins with regional banks, combined with a growing professional services and backlog delivery engine, position SEI to pursue additional wallet share as banks retire legacy systems, which could affect recurring revenue and margin stability.
• Early but growing deployment of AI, automation and tokenization across internal workflows and client-facing platforms is intended to enhance scalability, reduce unit costs and improve throughput, which could influence long term operating margins and EPS relative to revenue.

Assumptions

This narrative explores a more optimistic perspective on SEI Investments compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming SEI Investments's revenue will grow by 7.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 31.1% today to 28.0% in 3 years time.
• The bullish analysts expect earnings to reach $785.4 million (and earnings per share of $6.84) by about December 2028, up from $698.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from 14.6x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.2x.
• The bullish analysts expect the number of shares outstanding to decline by 3.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bullish view leans heavily on the alternatives and private credit boom continuing, but management acknowledges that newer, smaller credit managers could struggle in a more volatile or higher default environment. If industry wide stress dampens product launches or slows capital deployment, SEI's invested capital based fee pools in IMS could grow more slowly, which could pressure revenue and earnings growth over time.
• SEI is deliberately front loading spending on technology, AI, tokenization and talent ahead of anticipated growth, and management has already cautioned that IMS margins could flatten or decline into 2026. If the long term sales pipeline or international expansion fails to materialize at the expected pace, elevated cost levels could structurally compress operating margin and limit EPS expansion.
• The strategy assumes SEI can scale its regional banking and private banking franchises despite a known large client deconversion and rising expense to deliver backlog. If more banks pursue operating model shifts, insource capabilities or delay tech transformations in response to regulatory or macro uncertainty, Private Banking revenue growth could stall and segment margins could deteriorate, which could reduce consolidated profit growth.
• A substantial portion of recent momentum in Advisors and IMS has benefited from market appreciation across equities and fixed income, as well as performance fees at LSV. A prolonged period of weaker markets or style headwinds could reduce assets under management and administration growth, mute performance fees and slow fee based revenue, which would directly weigh on earnings and constrain upside to net margins.
• The capital allocation strategy commits 90 to 100 percent of forward free cash flow to dividends and especially buybacks while also earmarking a large excess cash balance for the Stratos acquisition and seeding new products like the LSV market neutral fund. If these investments or the Stratos integration underdeliver on cross sell and margin synergies, SEI may see only modest incremental revenue and EPS uplift despite significant capital deployment and reduced balance sheet flexibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for SEI Investments is $115.0, which represents up to two standard deviations above the consensus price target of $95.17. This valuation is based on what can be assumed as the expectations of SEI Investments's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $67.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $785.4 million, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $83.0, the analyst price target of $115.0 is 27.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.