SPS Commerce: Looking Vulnerable In This Market Environment

May 29, 2022 1:38 AM ETSPS Commerce, Inc. (SPSC)


  • SPS Commerce has been a continued secular growth play in recent years.
  • The company has seen a solid 2021 in terms of sales growth, but (realistic) earnings growth has been underwhelming.
  • While the long-term positioning is good, valuations remain very demanding, creating a dangerous setup given the mantra of the market these days.
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Shares of SPS Commerce (NASDAQ:SPSC) have seen a modest correction in line with the wider market in recent times. Late in 2020 I labelled SPS as an under the radar growth play, one trading at a full price. Fast forwarding one and a half years in time, shares are trading at similar levels as they did late in 2020, despite continuation of growth albeit that valuations continue to be nosebleed high.

Former Take

SPS Commerce is a long-term secular growth play, having a mission to connect retail trading partners to join the network. This includes commerce, retailers, sourcing companies, factories, suppliers, 3PLs, carriers and factories, among others.

The company believes that omnichannel capabilities and increased collaboration across the chain result in greater integration between systems and better optimized fulfillment as well. The company operates in the so-called EDI market, providing (retail) customers with end-to-end electronic data integrations, as well as integration with ecosystems like Shopify (SHOP).

When I looked at the company late in 2020, the company has seen rapid growth with sales up from less than $50 million in the year 2010 to just over $300 million in 2020, and EBITDA margins improved to around 25%. Sales have six-folded over a decade long period, implying around a 20% compounded annual growth rate.

Shares traded at $105 per share at the time of writing towards the end of 2020, and valuations were quite demanding. The 36 million shares valued equity of the company at $3.8 billion, that is for a business set to generate just over $300 million in revenues in the year, and earnings were seen at nearly $1.50 per share.

On a side note, net cash had risen to $260 million, but even if we factor in that net cash position of just over $7 per share, valuations were extremely demanding. Furthermore, part of that net cash position was set to disappear as SPS Commerce reached a $100 million deal to acquire EDI solution provider Data Masons, set to contribute $20 million in annual sales.

Given the sky-high valuation, with the adjusted earnings numbers excluding stock-based compensation expenses, I saw no reason to get involved with the shares despite arguably a nice bolt-on deal announced at the time.

What Happened?

After shares were trading around the $100 mark for the first half of 2021, shares rallied to a high around $175 by late summer, and ever since shares have seen a correction as well amidst concerns about online and e-commerce growth, with shares now down to $108 per share. This results in zero returns over the time frame of about 18 months, making SPS even an outperformer here, at least versus other technology peers.

Early in 2021, the company posted its 2020 results with revenues up 12% to $312 million, operating profits came in at $50 million, and GAAP earnings came in at $1.26 per share. Later in 2021, the company announced a $17 million bolt-on deal for Genius Central, truly a bolt-on transaction.

By February of this year, the company posted its full year results for 2021. Fourth quarter revenues were up 23%, with full year sales up 23% as well to $385 million. GAAP operating profits rose in a modest fashion to $55 million, with GAAP earnings growth in part held back by amortization charges doubling to $10 million. GAAP earnings fell a few pennies to $1.21 per share, and adjusted earnings rose from $1.53 per share to $1.82 per share, as the increased discrepancy stems from amortization charges, but certainly stock-based compensation expenses as well.

Net cash has risen to a quarter of a billion again, amidst a flattish share count of 37 million shares, and the company issued a much more moderate guidance for 2022 with sales seen up 15% to a midpoint of $444 million. The trouble is that while adjusted earnings are set to rise towards the $2 per share mark, GAAP earnings are seen down a few pennies to $1.15-$1.18 per share, and the discrepancy is really driven by increasing stock-based compensation expenses.

Following a solid first quarter earnings report, in which sales rose 17% to $105 million, the company hiked the full year earnings guidance by a few pennies. Adjusted earnings are now seen at a midpoint of $2.08 per share, with GAAP earnings seen at a midpoint of $1.23 per share. With shares down to $108 at the moment of writing, and the valuation coming in at $100 per share after we adjust for net cash, valuations remain nosebleed high.

Concluding Remark

Given the times we find ourselves in, and the still extremely high earnings multiples, I see no reason to get involved here with the shares just yet. With a current $3.7 billion enterprise valuation, the company trades around 8 times sales and realistic 70 times earnings multiple. This comes as I peg realistic earnings close to $1.50 per share; not feeling comfortable to exclude stock-based compensation in the earnings being reported.

Given the market momentum (or lack thereof to be more precise), rising interest rates and cooling off of the e-commerce market, I simply see no reason to be involved just now. This is even more the case as shares have held up quite well compared to the implosion seen by other technology names as of recent, making this an easy avoid for me.

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This article was written by

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Finding value that gets unlocked in M&A, IPOs and other corporate events
The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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