Summary
- SPS has a decade of growing revenues, profits, and cash flows.
- It has a marquee client base and doesn't price its offering on a per-transaction basis, meaning it should be less sensitive to the shifting retail climate than one may assume.
- While SPSC stock has a good amount of future growth already priced in, the relatively cheaper cash valuation and overall fundamental picture still make this a buy in my book.
Overview
SPS Commerce ( SPSC ) is a supply chain automation software company. They leverage a proprietary electronic data interchange ((EDI)) capability to allow automated communication between retailers, distributors, and suppliers. The firm's technology allows for what is normally a manual and heterogenous set of purchasing processes to be done through a unified interface and data model.
The primary types of transactions that the company helps automate are what you would expect - invoicing, inventory inquiries, and purchase orders.
SPS Commerce has been around since 1997 and first entered the public markets via IPO in Q2 2010. It has significantly outperformed both the S&P 500 as well as the NASDAQ Composite (IXIC) since then.
While not a particularly high-profile company, SPS Commerce has performed well throughout its operating history. Notably, the firm has exceeded consensus expectations on a per-share earnings basis for 4 quarters running. This article will review the firm's financials and valuation in order to determine if it's a quality investment going forward.
Financials
Looking at the company's revenues, we see a picture of consistent double-digit growth every year for the past decade, including a 23.24% YoY revenue uptick after the onset of the 2020 pandemic period. This is a good level of growth for a software company of its size, although it's worth keeping in mind that the company is handedly middle-sized, with a less than $500M yearly run rate; at current growth rates it should achieve this in the present year 2023.
SeekingAlpha.com SPSC 2.23.23 SeekingAlpha.com SPSC 2.23.23
Throughout the past decade the company has also demonstrated the same level of consistency in terms of profitability. Its net income has also grown 50x throughout the last decade, with the company appearing to turn the corner on material profits in the 2018 fiscal period. These numbers certainly speak to what is a proven business model and a relatively mature software company as a whole.
SeekingAlpha.com SPSC 2.23.23 SeekingAlpha.com SPSC 2.23.23
This business performance is occurring against the backdrop of what is a healthy balance sheet. The company has maintained positive book value for the past decade as well as negative net debt (more assets than liabilities). There isn't anything to be concerned with here - the company's total debt of $17.3M is only 3.8% of its yearly revenues.
As to cash flow, the picture is also a healthy one. It hasn't paid a single dollar of interest throughout its operating cycle, proving a capacity to continually operate itself with its own cash flows. Additionally, free cash flows have been sound and have hit record levels in the prior fiscal year; this is good to see.
Overall these financials look quite healthy to me and are pointing in the right direction.
Valuation
While the fundamentals here are robust, the security is fairly expensive and trades at a premium valuation across all of the core metrics. Looking at its non-GAAP P/E multiple (standard for technology entities), we see that it is trading at a 2.42x multiple relative to the application software GICS sector.
The trading multiple for SPSC is even higher when we look at its price relative to sales, with a 3.23x premium relative to its sector.
As to its cash flow price, however, SPSC stock is actually somewhat cheaper - trading only at 1.62x multiple. This makes me think that its valuation may not be quite as expensive as it seems at first blush; the company is provably and consistently generating cash flows and is cheaper on this basis than the other metrics. Since this is a mature/built-out entity, it can move the needle on its bottom line performance via operating efficiencies and continuing to build out its business.
I would call this valuation expensive but not to an extreme degree, given the cash flow multiple. Investors have already priced in a good amount of future growth into this stock.
Idiosyncratic Factors
Since SPS Commerce is a retail supply chain software company, it would make sense that its business performance is correlated to the overall retail environment. However, this should not be as much a concern as one may think due to the fact that the firm does not charge on a per-transaction basis. Simply put, once the software is bought and sold, the amount of business that any of its customers is doing doesn't translate into SPS' revenue figures.
This can be readily corroborated by looking at the fact that SPS continued to grow profits even through the retail sales slowdown that we saw in Q4 of 2022.
St. Louis Fed Advance Retail Sales 2.23.23
Additionally, the company is already working with some of the largest names in retail. Taking a quick look at the company's roster of clients, we see that it is already partnered with large-scale marquee players such as Walmart (WMT), Cabela's, and Amazon (AMZN).
Spscommerce.com 2.23.23 Spscommerce.com 2.23.23
As such, I think that the current macroeconomic climate can potentially hamper new client acquisition for SPS but should not affect its current revenue base. This means that, as a worst case, we can expect it to stay steady for a few years. It has the cash efficiency and balance sheet to ensure that this doesn't really become too much of a problem.
Conclusion
This is a quality stock and is priced as such. The range of fundamentals, from revenues to cash flows, look good and are consistently improving. Additionally, I think this company is relatively insulated from the retail environment due to logic that I outlined above. I don't think that they will see a decrease in profits, although they may see a decrease in growth rate. This is material as investors have clearly priced in a good amount of future growth into the stock. Nonetheless, the picture here overall is good enough for me to categorize it as slightly above a hold rating and call it a buy for the long term.
For further details see:
SPS Commerce: Robust Fundamentals Should See It Shine Through Choppier Macroeconomic Waters