Summary
The logistics network platform is growing in importance amid the supply chain complexity.
Descartes will demonstrate strong growth from here.
Price target of nearly $85 discussed.
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xavierarnau/E+ via Getty Images Speculators penalized technology companies whose expenses exceeded revenue in the ongoing correction. Markets no longer want to listen to growth firms who insist the quarterly losses are typical when re-investing into its future. Amid the selling, markets sent Descartes Systems ( DSGX ) below its 200-day moving average. The stock’s 22% discount from its 52-week high gives technology investors a chance to own a unique logistics software firm at a reasonable price. Logistics Platform
Descartes runs an expansive logistics network platform. Its offering of global trade-related intelligence is more valuable than ever. The supply chain faced serious disruption due to the pandemic from 2020-to 2021. Russia’s invasion of Ukraine worsened the supply system. For example, cargo planes cannot fly near Russian skies. This is harming air cargo capacity. Logistics firms including FedEx ( FDX ), DHL, and EPS suspended shipments to the country. Ships cannot sail in the Black Sea amid the invasion.
The disruption raises the importance of Descartes solution for supplying real-time visibility space. In the fourth quarter, the company posted record-high results. It attributed the strong performance to adapting its business to a changing and complex environment. Furthermore, past acquisitions are paying off for Descartes. Strong Fourth Quarter
In the last quarter, Descartes posted revenue growing by 20.3% Y/Y to $112.4 million, a record. Unlike money-losing growth companies posting non-GAAP first, the company reported GAAP earnings per share of 22 cents. Stock-based compensation, which is very high for companies like Twilio ( TWLO ), Palantir ( PLTR ), or PayPal ( PYPL ), is a negligible cost for Descartes. It posted stock-based compensation of just $11.6 million for the full year of 2022 . This is up from $6.6 million in 2021.
Descartes reported the amortization of intangible assets well below its net income of $86.3 million for the year. Descartes Systems On its conference call , the company highlighted the contribution of MacroPoint strengthening its visibility services. Descartes wants to enhance service quality for its customers. As a result, customers get a real-time visibility provider in the market. Its Global Logistics Network connects all parties to shipping movements. In 2021, Descartes tracked over 575 million shipments in real-time.
Above: DSGX stock fell alongside Nasdaq’s correction.
The company expects MacroPoint will continue to have strong momentum this year. Furthermore, it has experience merging over 50 businesses to its platform. Last March, Descartes acquired QuestaWeb , a provider of foreign trade zone and customs compliance solutions. Two months later in May 2021, it acquired Portrix Logistics Software . Portrix provides multimodal rate management solutions for logistics services providers (LSPs). LSPS gets a digitalized experience. This complements its investments in containers, such as ocean carriers.
Descartes rounded out its route management mobile offering with its GreenMile acquisition last year. Moreover, with NetCHB , a provider of security and customs filing solutions, investors should expect growth accelerating beyond the low 20% rate posted last quarter. Opportunity
The rise in sanctions against Russia and Belarus will hurt supply chains. Companies will need Descartes to manage the growing complexity and change in shipping logistics. For example, it will compile a list of sanctioned parties on its platform. From there, it will assist firms in establishing new trading relationships with parties in new countries. Customers will rely on Global Logistics Network to connect with them.
Descartes is capitalizing on Brexit. This drove its growth in the Iberia region last year. Related to that is the strong economy in EMEA. This also added meaningfully to its growth last year. An increase in supply chain visibility will expand the company’s routing and scheduling business. Readers may infer that revenue grows by at least 20% annually in the next five years.
In a five-year discounted cash flow model (revenue exit), assume the metrics in the table below.
Here is Descartes’ baseline revenue growth: (USD in millions) Input Projections Fiscal Years Ending 22-Jan 23-Jan 24-Jan 25-Jan 26-Jan 27-Jan Revenue 425 510 612 734 881 1,057 % Growth 21.80% 20.00% 20.00% 20.00% 20.00% 20.00% % of Revenue 41.00% 43.80% 44.80% 40.00% 40.00% 40.00% Model courtesy of finbox
This would imply a fair value of almost $85 for DSGX stock. Risks
Nasdaq’s steep correction hurt high valuation […]
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