We came across a bullish thesis on Descartes Systems Group (DSGX) on X (formerly Twittter) by user WTCM. In this article we will summarize the bulls’ thesis on DSGX. Descartes Systems shares were trading at $35 when this thesis was published, vs. today’s price of $100.49.
A supply chain employee using the company’s secure supply chain management software to update their customer’s records.
On August 25 2019, Wolfe initiated coverage on Descartes Systems Group Inc. (DSGX) with an Outperform rating. As a leading SaaS provider in supply chain technology and transportation management, DSGX caters to many trucking and logistics companies. Compared to traditional transport coverage, DSGX is positioned for sustained, high-end growth, benefiting from disruptive trends such as e-commerce and automation.
DSGX operates as a SaaS business with 88% of its revenue being recurring. Although its acquisitive model impacts returns on capital, the company boasts impressive financial metrics: over 70% gross margins, 35% EBITDA margins (and rising), and low-teens free cash flow returns on capital. Over the past decade, DSGX has achieved consistent revenue and EBITDA growth, with 10-year compound annual growth rates (CAGRs) of 15% for revenue and 19% for EBITDA.
DSGX has a robust acquisition strategy, averaging 3-4 acquisitions annually over the past ten years to expand its service offerings. With a recent secondary offering and a current pipeline of approximately 100 deals, DSGX is expected to maintain and potentially accelerate its growth trajectory. This growth strategy is similar to the early days of companies like GWR and WAB before their transformational deals.
DSGX is trading at 22x its 12-month forward EBITDA, which is higher compared to typical transport stocks, especially at this stage of the economic cycle. However, due to its strong margins, solid free cash flow, and significant growth potential, this valuation is deemed sustainable. DSGX is also trading at a discount compared to other SaaS and vertical software companies considered as comparables.
Overall, DSGX is well-positioned for secular growth in a cyclical world, with a quality SaaS business model, strong financial performance, and a strategic acquisition approach that supports its long-term growth potential.
DSGX shares tripled since the publication of Wolfe’s report almost 5 years ago. Today DSGX is trading at a forward P/E of 49. In its most recent earnings call DSGX reported revenue and services revenue up 11%, adjusted EBITDA up 16%, and adjusted EBITDA margin steady at 44%. While there was initial weakness in domestic and international shipping volumes, the company expects an uptick in the coming months due to increased ocean volumes. Overall, Descartes Systems Group reported a strong quarter with a positive outlook for the future. The company is well-positioned to benefit from ongoing challenges in the global supply chain and compliance landscape.
DSGX is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held DSGX at the end of the first quarter which was 20 in the previous quarter. While we acknowledge the potential of DSGX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DSGX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
