Acquisition Of Carbon6 And EDI Integration Will Expand Capabilities

Key Takeaways

• Carbon6 acquisition and advanced EDI systems aim to boost revenue and strengthen SPS Commerce's market position and customer relationships.
  
• Focus on supply chain automation and community programs may enhance vendor compliance and drive recurring revenue growth.
  
• Macroeconomic uncertainties and delays in digitization efforts could hinder SPS Commerce's revenue growth, affecting customer acquisition and increasing operational costs.

Catalysts

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

• The acquisition of Carbon6 is expected to expand SPS Commerce's portfolio and establish a leading position in the revenue recovery category, which could drive future recurring revenue and enhance customer relationships.
  
• SPS Commerce's strategy to integrate advanced EDI systems to streamline supply chain processes and improve operational efficiency, as demonstrated with customers like Barilla, positions the company for long-term growth in revenue and market expansion.
  
• The focus on promoting supply chain automation and efficiency through the adoption of advanced technologies, such as the supply chain performance scorecard, could enhance vendor compliance and trading partner connections, potentially boosting future revenue growth.
  
• The continued execution of community enablement programs across diverse retailers offers opportunities for increasing their customer base, which is a key driver of recurring revenue growth for the company.
  
• The company's ability to implement operational efficiencies across supply chains and improve gross margins reflects a solid foundation for expanding EPS, given the current strong adjusted EBITDA growth and financial performance.

SPS Commerce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SPS Commerce's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $130.1 million (and earnings per share of $3.04) by about April 2028, up from $81.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $116.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 68.7x on those 2028 earnings, up from 66.4x today. This future PE is greater than the current PE for the US Software industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 2.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

SPS Commerce Future Earnings Per Share Growth

Risks

• The ongoing macroeconomic uncertainties, such as tariffs and trade dynamics, could potentially impact SPS Commerce's revenue by creating hesitancy in their customers to engage in new enablement campaigns, thereby slowing down customer acquisition.
  
• The decline in the analytics segment, due to economic factors like tariffs, shows a vulnerability in SPS that can affect revenue streams, as analytics comprise a notable part of their offering.
  
• Carbon6's acquisition brought an unexpected increase in customer numbers, but it may also imply increased short-term integration and operational costs, impacting net margins in the interim.
  
• The potential delay in spending and investments due to uncertainties in the global economic environment could disrupt the company’s capacity to achieve long-term growth, impacting projected earnings.
  
• If retailers and suppliers delay digitization efforts and investments in supply chain technologies due to economic uncertainty, it could lead to stunted growth in SPS's revenue from fulfillment and other services.

Valuation

• The analysts have a consensus price target of $179.25 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 $210.0, and the most bearish reporting a price target of just $159.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $130.1 million, and it would be trading on a PE ratio of 68.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $142.0, the analyst price target of $179.25 is 20.8% 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.