AI And Retail Network Data Will Shape A Moderately Favorable Long Term Outlook

Catalysts

About SPS Commerce

SPS Commerce provides cloud based retail network and data driven supply chain solutions that connect retailers, suppliers and logistics partners.

What are the underlying business or industry changes driving this perspective?

• Although retailers and suppliers continue to digitize supply chains and standardize data flows, prolonged spend scrutiny and delayed enablement campaigns risk elongating sales cycles and capping ARPU growth, which could restrain revenue acceleration and earnings expansion.
• While SPS is positioning its network data as a critical input for AI driven use cases, rapid advances in in house AI tooling and alternative automation platforms could compress pricing power on connection based subscriptions and limit long term margin expansion.
• Despite strong long term demand for omnichannel retail and trading partner collaboration, persistent tariff related cost pressures on suppliers may keep budget priorities focused on near term cost cuts rather than new SPS modules, slowing new logo additions and dampening recurring revenue growth.
• Although the expanded revenue recovery portfolio taps into a sizable addressable market across large retailers, increased shipment variability in third party marketplaces and evolving marketplace policies could keep take rate revenues volatile, limiting the contribution to overall top line growth and EBITDA leverage.
• While consolidation of EDI and digital connection providers should favor a scaled network, ongoing softness in mid market ERP replacement projects may reduce high quality change events that historically fueled customer additions, weighing on future revenue growth and slowing progress in operating margin improvement.

Assumptions

This narrative explores a more pessimistic perspective on SPS Commerce compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming SPS Commerce's revenue will grow by 8.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.7% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach $135.5 million (and earnings per share of $3.4) by about December 2028, up from $85.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $160.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 28.2x on those 2028 earnings, down from 38.2x today. This future PE is lower than the current PE for the US Software industry at 32.9x.
• The bearish analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company has delivered 99 consecutive quarters of revenue growth and is guiding to approximately 18% revenue growth in 2025 and 7% to 8% in 2026. This indicates a growth profile that investors may reward if top line expansion remains consistent and scale benefits continue to support earnings.
• Management expects at least high single digit annual revenue growth and around 2 percentage points of adjusted EBITDA margin expansion over the long term. This suggests a path to rising profitability that could support earnings growth, as well as valuation multiples and net margins over time.
• The expanding retail network, new logo momentum from retailer relationship management programs, and a growing cross sell motion, especially in revenue recovery, increase the addressable base and ARPU potential. This could affect the trajectory of recurring revenue and long term earnings power.
• Strategic M&A in revenue recovery and EDI consolidation, together with integration of acquired assets and a combined go to market engine, may create additional growth vectors beyond current guidance and influence medium term revenue trajectories and adjusted EBITDA.
• Investments in AI driven internal efficiencies and data monetization, particularly in customer onboarding and go to market workflows, are already associated with gross margin gains. These initiatives could further affect operating leverage and the growth profile of operating income and net income relative to a flat share price view.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for SPS Commerce is $80.0, which represents up to two standard deviations below the consensus price target of $98.0. This valuation is based on what can be assumed as the expectations of SPS Commerce's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $80.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $921.4 million, earnings will come to $135.5 million, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $86.23, the analyst price target of $80.0 is 7.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.