The WiseTech Global Limited (ASX: WTC) share price is being crunched, down 9% at the time of writing. Is the WiseTech share price about to unravel?
About WiseTech
WiseTech Global was founded in 1994 by Richard White to provide software for 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.
The Bull Case
WiseTech has established itself as the dominant player in the logistics sector and it has managed to beat most of the competition. WiseTech reports that 38 of the top 50 global third-party logistics providers now use WiseTech products, as well as every one of the top 25 global freight forwarders.
That’s an impressive figure and it demonstrates the quality of WiseTech’s product. It’s a big competitive advantage and it’s reflected in their growth figures.
1H19 saw a 68% increase in revenue with a 48% compounded annual growth rate (CAGR) over the last four years. EBITDA increased 52% and WiseTech reported a net profit after tax (NPAT) of $23.1 million. The following video from Rask Finance explains EBITDA in detail:
The Bear Case
While all of the above results are impressive and highlight WiseTech’s competitive advantage, there are some issues.
For example, the ongoing US-China trade war is having a big impact on global trade tensions and is making it increasingly difficult for some companies to import and export. Take the recent GrainCorp Ltd (ASX: GNC) results as an example – while the drought has had a big impact, they report trade tensions as one of the main reasons that they are reporting a loss for FY19 after a $70 million profit last year.
WiseTech, as a provider to freight forwarders and logistics companies, is inevitably going to be affected by trade tensions and both the US-China trade war and Brexit negotiations pose concerns.
Aside from industry tensions, the valuation of WiseTech shares is a big issue for many investors. It may be a high-growth company but a price-earnings (PE) ratio of 196 times is still more than double the ratios of other growth companies like Altium Ltd (ASX: ALU) and Appen Ltd (ASX: APX).
While this is only one measure, it should raise questions about how such a valuation can be justified.
Summary
WiseTech seems like a great company with a highly-effective product and many loyal customers. However, ongoing trade tensions will cause problems for the company and the current valuation seems to defy logic.
This may not be the unravelling of WiseTech shares, but I don’t see how investors could be buying shares at the current price.
I’d rather invest in one of the growth shares mentioned in the free report below.
[ls_content_block id=”18457″ para=”paragraphs”]
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
