SPS Commerce (SPSC) Margin Decline Challenges Bullish Earnings Growth Narrative

SPS Commerce (SPSC) is forecasting revenue growth of 8.6% per year, which trails the broader US market’s 10.3% pace. Meanwhile, profits are expected to rise 19.1% annually, outpacing the market norm of 15.9%. The company’s latest profit margin sits at 11.7% compared to 12.8% a year ago, and recent earnings growth of 8.3% fell below the five-year average of 15.4% per year. With no major or minor risks flagged and three reward signals in play, investors are likely to focus on the strength of SPS Commerce’s recurring profit growth and forward-looking earnings profile, especially against its premium valuation.

See our full analysis for SPS Commerce.

Now, let's see how these numbers compare to the narratives investors follow most closely. This will highlight where the data matches up and where it might surprise the market.

See what the community is saying about SPS Commerce

DCF Fair Value Sits Well Above Market Price

• SPS Commerce’s current share price of $82.24 is trading approximately 33% below its DCF fair value estimate of $123.20, revealing a significant gap between market price and underlying cash flow fundamentals for the business.
• According to the analysts' consensus view, this disconnect challenges the caution implied in the company’s high price-to-earnings ratio of 36.5x compared to industry peers. The discounted cash flow valuation suggests there could still be considerable upside, assuming profit margins rise to 14.4% within three years.
  • Consensus narrative notes that despite slower revenue growth expectations, SPS Commerce’s ongoing margin expansion—including forecasts up from 11.8% today to 14.4% in three years—could help close the gap to fair value if operational improvements materialize as projected.
  • It is notable that even though the company trades at a premium on earnings multiples, the DCF approach implies the market may still be undervaluing SPS’s ability to generate long-term, quality profits from its expanding software network.

See how the DCF fair value, margin trends, and recurring profits all stack up in the full Consensus Narrative. 📊 Read the full SPS Commerce Consensus Narrative.

Margin Expansion Expected Through Operational Efficiency

• Analysts expect SPS Commerce’s profit margin to expand from 11.8% today to 14.4% over the next three years. This reflects a clear focus on operational leverage and efficiency improvements amidst industry headwinds.
• Consensus narrative highlights that these projected gains are grounded in automation and onboarding investments, as well as management’s push for improved customer delivery, which together should drive not only higher margins but also provide resilience against competitive and pricing pressures.
  • Consensus points to the company’s use of generative AI and streamlined integration of recent acquisitions such as SupplyPike and Carbon6 as catalysts for supporting margin and revenue per user growth even when customer spending tightens.
  • The narrative credits SPS Commerce’s established market position and robust recurring revenue model for insulating profit quality and margin resilience, particularly as wider economic conditions fluctuate.

Premium Valuation Versus Peers, But Analyst Target Is Higher

• SPS Commerce is valued at a price-to-earnings ratio of 36.5x, compared to a peer average of 16.9x and US software industry average of 34.1x. This signals a premium that investors must justify through superior growth or execution.
• Consensus narrative notes that the consensus analyst price target sits at $125.82, about 53% above the current share price. This forecast assumes investors are willing to pay a much higher multiple—53.0x—on future 2028 earnings, a stretch above the current industry standard.
  • Consensus also points out that to meet the $125.82 price target, SPS Commerce needs to deliver on its projected $139.1 million in earnings by 2028, as well as expanded recurring revenue streams from new customer adds and product cross-sells.
  • This creates tension: while excellent execution could justify the premium, any shortfall in margin or top-line expansion may revert the multiple much closer to industry norms, tempering upside for today’s shareholders.

Next Steps

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for SPS Commerce on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

Have a unique perspective on the figures? Take just a few moments to craft your own interpretation and share what you see. Do it your way.

A good starting point is our analysis highlighting 3 key rewards investors are optimistic about regarding SPS Commerce.

See What Else Is Out There

SPS Commerce’s reliance on optimistic margin expansion forecasts and a premium valuation means that any stumble in growth or execution could quickly erode investor returns.

If you'd prefer companies demonstrating strong fundamentals at compelling prices, check out these 832 undervalued stocks based on cash flows for a list of those currently trading below their underlying value.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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