The WiseTech Global Ltd (ASX: WTC) share price has grown gangbusters since the beginning of 2016 when it was trading at $6.
What Does WiseTech Global Do?
WiseTech Global was founded in 1994 by Richard White to provide software to the logistics sector. Since then it has grown to become a global provider of logistics software, claiming to service 19 of the top 20 logistics companies globally. WiseTech makes money by charging its customers on a ‘per use’ basis rather than as a standard subscription model. Meaning, WiseTech directly benefits as its customers grow their businesses.
There’s a lot to like about owning WiseTech shares. I wish I bought some back in 2016. But as with every investment it’s not free from risk, so let’s consider both sides of the debate.
The WiseTech Global Bulls Will Tell You…
It’s estimated WiseTech has less than 5% share of the global market, and much of the other software used in the market is created by in-house developers at logistics companies. Meaning, the industry is ripe for WiseTech’s picking.
WiseTech says 99% of its customers are retained/recurring. Many ‘sticky’ software companies have a high rate of recurring customers and/or revenue, which is a great advantage and makes them money-printing machines. WiseTech’s claim of 99% recurring customers is exceptionally high and, in my view, is a function of its network effect and high switching costs.
Being Founder-led, WiseTech has a proven owner-operator at the helm, who has guided the company to impressive rates of revenue and customer growth. Reinforcing the management team’s stewardship are the multiple small acquisitions conducted in more recent years.
The WiseTech Global Bears Will Tell You…
Thinking about some of the risks for a moment, there are plenty. Here’s one to consider…
Firstly, WiseTech’s key advantage against global enterprise software (ERP) giants like SAP SE (ETR: SAP) and Oracle Corp (NYSE: ORCL) has been its agility and focus. For example, WiseTech won DHL as a customer following the botched implementation of SAP software by IBM. While there are plenty of growth levers for WiseTech, it’s not the only company operating in the market.
For example, Canada’s Descartes Systems Group Inc (TSE: DSG) is another impressive company operating in the space. Descartes is similar to WiseTech in scale and presence. Descartes ranked 6th (by revenue) in Gartner’s Top 20 Supply Chain Management Software Suppliers for 2017. WiseTech was 10th. The rankings are nuanced but the point stands — it’s not all blue sky for WiseTech.
Valuation
A headache for the WiseTech bears is valuation.
Like Australia’s best accounting software provider, which I purposely won’t name here, WiseTech invests its cash flow aggressively back into Research & Development (R&D) (it capitalises some of its spending). The R&D investments are a sound long-term move by management in my opinion, but it does have the effect of depressing profitability in the short term.
Lower profits stretches the valuation of WiseTech shares. Thus, WiseTech’s current price-earnings (P/E) ratio of 106x seems outrageous. However, we need to consider that every $1 it puts back into R&D will likely lead to multiples more over many years (don’t forget that customer retention rate!).
Buy, Hold or Sell WiseTech
To recap, it has founder at the helm, low gearing, network effects, high switching costs, impressive margins and lots of optionality. WiseTech is one of the highest quality shares on the ASX, so at the very least it’s on my watchlist.
However, for me, right now, WiseTech shares are simply priced with too much optimism. That’s why I don’t own it. Sometime over the next few years I’m confident I’ll get the chance to buy shares for a compelling valuation, so I’m happy to wait patiently on the sidelines.
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