Acquisitions Of Vision33 And Expansion Into Europe Will Strengthen Future Prospects

Key Takeaways

• Strategic acquisitions and international market expansion are expected to boost product offerings, network reach, and long-term revenue growth.
  
• Strong relationships with major retail brands enhance supply chain resilience and could expand wallet share and net margins.
  
• Reliance on growth via new geographies and acquisitions carries execution and integration risks that could impact revenue and profitability.

Catalysts

Provides cloud-based supply chain management solutions in the United States.

• SPS Commerce's acquisitions of Vision33's SAP Business One integration technology, Traverse Systems, and SupplyPike, along with the recent acquisition of Carbon6, position the company for expanded product offerings and an increased network reach. This should drive higher future revenue and enhance profitability through scale and cross-selling opportunities.
  
• The calculated expansion of the total addressable market (TAM) to $11.1 billion globally, with a specific focus on increasing wallet share and customer count, underscores substantial growth potential. This is likely to positively impact revenue growth over the long term as SPS continues penetrating the market.
  
• SPS Commerce's strong relationships with leading retail brands like Canadian Tire and GNC demonstrate potential for wallet share expansion as these companies rely on SPS for ongoing supply chain resilience and optimization. This could positively affect revenue growth from existing large clients and improve net margins through increased efficiencies.
  
• The focus on digitization and increased data-driven decision-making tools (e.g., analytics, automated data exchange) allows clients like GNC to improve compliance and operational efficiencies. This indicates potential improvement in net margins and customer retention through enhanced service offerings and operational value.
  
• The integration of recent acquisitions and expansion into international markets, notably Europe with strategies aligned to local needs, is expected to contribute to long-term revenue growth. This should enhance earnings by capturing new market share and leveraging existing operational infrastructure more effectively.

SPS Commerce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SPS Commerce's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $130.3 million (and earnings per share of $3.22) by about April 2028, up from $77.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 74.5x on those 2028 earnings, up from 63.5x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 2.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

SPS Commerce Future Earnings Per Share Growth

Risks

• The reliance on forward-looking statements and the associated risks and uncertainties could result in actual financial results that differ materially from expectations, impacting earnings and revenue projections.
  
• The company's growth strategy heavily relies on community enablement programs and expanding into new geographies, such as Europe, which carries execution risks potentially affecting new customer acquisitions and revenue.
  
• While the TAM analysis suggests a large available market, the strategy relies on significant upscaling of wallet share, especially with medium and large customers, which may not materialize as expected and could impact revenue growth.
  
• The impact of macroeconomic factors, such as retail environment fluctuations and tariff changes, remain uncertain and could lead to variability in customer demand, affecting revenues and net margins.
  
• Though SPS Commerce has recently completed acquisitions to bolster its product portfolio, integration challenges and potential for not realizing expected synergies pose a risk to profitability and adjusted EBITDA growth.

Valuation

• The analysts have a consensus price target of $194.75 for SPS Commerce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $230.0, and the most bearish reporting a price target of just $154.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $997.7 million, earnings will come to $130.3 million, and it would be trading on a PE ratio of 74.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of $128.66, the analyst price target of $194.75 is 33.9% higher.
• 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.