WiseTech Global Ltd (ASX: WTC) is Australia's newest billion-dollar company, after listing on the ASX just over a week ago.
WiseTech has a market cap of $1.2 billion, at the current share price of $4.02, after selling shares in the IPO at $3.35. Just over 18% of the company was sold to the public and fund managers, with founder and CEO Richard White retaining a 50% stake in the business.
WiseTech develops software for the global freight and logistics industries and now has more than 6,000 customers in over 115 countries. The company's flagship product, CargoWise One allows multiple users along the freight chain to interact, streamlining their operations for what can be an exceedingly complex process – as the below chart showing the movement of one good between two countries suggests.
Competition
Competitors range from large enterprise resource planning (ERP) software suites to specialist software solutions, differing in country and functional coverage. However, consulting firm Frost & Sullivan sees WiseTech as one of the very few logistics service provider software companies with an integrated, SaaS-based, global supply chain execution solution across a range of industry-specific and enterprise-wide applications.
Opportunity
WiseTech estimates that the global supply chain execution market was worth US$3.5 billion in 2015, and is expected to grow to US$5.2 billion over the next four years, roughly 10% compounded each year.
Winning new clients, organic growth within existing clients as well as acquisitions should allow WiseTech to continue to grow ahead of the market. Recurring revenue is extremely high at 97%, suggesting customers are extremely sticky and include 19 of the top 20 largest global logistics companies.
Value?
On standard metrics, Wisetech doesn't look cheap at all – but when was the last time a high-quality tech company shares were cheap?
In the 2015 financial year (FY15) Wisetech had revenues of $79.6 million and a net profit of $10.4 million. That equates to a P/E ratio of ~111x and a ratio of 14.6x revenues.
Construction software technology firm Aconex Ltd (ASX: ACX) trades on a P/E of 165x and 10.7x revenues, while cloud-accounting software company Xero FPO NZX (ASX: XRO) trades on a ratio of 11.8x revenues.
The key is if the company can continue to grow rapidly – and its forecasts suggest that it can – with net profit soaring from $11.9 million in FY15 to $26.1 million in FY17. Continued growth like that for a few years and the P/E ratio is likely to come down substantially. A perfect example of that: REA Group Ltd (ASX: REA) had a P/E ratio as high as 121x in 2005, when the share price averaged ~$1.78. REA's share price is now over $50 and the P/E ratio is around 33x.
Foolish takeaway
There are high risks associated with investing in software technology businesses such as WiseTech, but like the REA example above proves, they can pay off over the long term.
And two other points. The proceeds of the IPO were used to pay down debt, potential acquisitions and the costs of the IPO rather than pay out insiders – which gets a tick im my book. The CEO and founder has retained a substantial stake in the business, meaning he particpates in both the ups and downs of the business just like retail shareholders.
As such, WiseTech might be one you want to add to your watchlist.
