Shareholders in WiseTech Global Ltd (ASX: WTC) have enjoyed a stunning year with the share price of the logistics software company more than doubling to close at $12.70 yesterday.
It isn't the only success story in this space with peers like Yojee Ltd (ASX: YOJ) and GetSwift Ltd (ASX: GSW) also giving investors reason to cheer as we head towards the festive season.
But the party may be ending early for WiseTech even after the company upgraded its FY18 guidance with Citigroup downgrading the stock to "sell" from "neutral" on valuation concerns.
Management said on Wednesday that it was confident of delivering revenue growth of between 35% and 41%, which implies sales of $207 million to $217 million, and earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 32%-39%, which implies a figure of $71 million to $75 million for the current financial year.
Revenue for FY18 is about $7 million ahead of initial estimates but Citigroup believes that around $5 million of the increase relates to the acquisitions of Cargosphere and Cargoguide, while $1 million of the increase relates to the lower $A to US$ exchange rate.
Further, management's EBITDA guidance remains the same and the stock is now trading well ahead of its peer group. Citigroup estimates that WiseTech is trading on an enterprise value/FY18 revenue (EV/FY18 sales) of 16.5 times. That is a 65% premium to its nearest listed rival, Descartes.
Even cloud accounting software company XERO FPO NZX (ASX: XRO), which has been another market darling, is trading at a more reasonable multiple of 10.9 times.
Perhaps WiseTech deserves to trade at a premium given its strong margins and the fact that it is well placed to benefit from the growth of e-commerce and the accelerating growth in US air cargo and Hong Kong sea freight volumes.
But even then, Citigroup thinks a more appropriate EV/sales multiple for WiseTech is 12 times. The broker believes fair value for the stock is $9.19, which suggests a close to 30% downside for the stock.
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