|Shares Out. (in M):||17||P/E||0||0|
|Market Cap (in $M):||933||P/FCF||0||0|
|Net Debt (in $M):||-146||EBIT||0||0|
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SPS Commerce sells supply chain software that utilizes a cloud-based network to automate the transfer of information among retailers, vendors, and 3PLs. The business enjoys substantial network effects, as more customers make the product itself more valuable. SPS grows recurring revenue organically 18-20%/yr, earns 5-6% GAAP EBITA margins, has almost no direct competition, and is selling into a TAM that is >10x current run rate revenue.
SPS achieves this growth using a predictable and repeatable sales model that generates high ROICs on S&M spend, so we estimate will reach $1B in revenue over the next ~10 years. If SPS instead chose to grow at GDP-like levels, thereby meriting a 14x NOPAT multiple, they could earn 40% GAAP EBITA margins. If you assume a ~35% mature tax rate, the justified “steady state” revenue multiple is thus 14x * 40% * (1 - 35%) = 3.6x.
SPSC currently trades at ~3.5x forward revenue, so at current prices you’re getting the “invest money in S&M to grow” call option for free.
SPS products integrate retailers with vendors:
The SPS sales model is unique and difficult to replicate:
SPS implementations are sticky:
SPS’s fulfilment product enjoys network effects:
This unique position in the retail supply chain allows SPS to expand services beyond fulfillment:
S&M ROIC is extremely high, so SPS prioritizes growth over cash flow:
There are a number of ways to come at the TAM. For reference, current run rate revenue is $180M.
Of equal importance to the size of the TAM is the rate at which SPS can grow into it. After analyzing a number of different data points, we believe SPSC can continue to grow recurring revenue organically at 18-20% for the next several years.
Here’s the supportive evidence:
Here’s the evidence that calls for caution:
We believe this business can achieve 40% GAAP EBITA margins in a steady state scenario…ie in a scenario where management chose to take up margins to a level at which the company grows with GDP, rather than 18-20%/yr.
We believe the majority of the bear thesis relates to the health of US retail in the face of threats from AMZN. We’re wary, but here’s what gives us a little comfort:
Ultimately retailers need technologies like those that SPSC provides to survive.
We and our affiliates are long SPS Commerce (SPSC) and may buy additional shares or sell some or all of our securities, at any time. We have no obligation to inform anybody of any changes in our views of SPSC. This is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please conduct your own research and reach your own conclusion.
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