The WiseTech Global Ltd (ASX: WTC) share price is down 12% to $26 this morning after impertinent short seller J Capital Research released a second report criticising the business.
The new report publicly available online alleges WiseTech has mislead the market about its churn or customer attrition rates that investors commonly tout as a key part of the bull case.
WiseTech has claimed that churn across its flagship CargoWise One platform is less than 1%, which is hugely impressive if true and suggests the company has a compelling product offering.
For a software-as-a-service (SaaS) company churn under 5% is generally good as the recurring revenue business model is both a strength and weakness.
A strength as it can offer high gross profit margins and strong top line growth, but a weakness as customers can call it quits anytime as they tend to pay monthly with no lock in mechanism.
Prior to SaaS for example software providers would usually charge clients a large upfront fee for several years, which meant the client was locked in but the revenue model was not not recurring.
The latest short seller report alleges, among other things, that WiseTech is not properly reporting "churn" levels from some of the 34 businesses it has reportedly acquired since going public.
J Capital also claims that WiseTech's FY 2019 organic revenue growth rate is only around 10% versus the 33% the company reported.
For investors it's hard to be certain how far down the line acquired revenue growth becomes organic revenue growth with roll-up business models requiring a certain leap of faith.
There's also the risk WiseTech has overpaid for some of acquisitions given the ease with which it could tap enthusiastic capital market investors for new funding at sky high valuations.
WiseTech itself has dismissed the short seller's allegations as self-interested nonsense.
As a share market investor it's important to stick to the fundamentals and remember that organic growth is king and the only kind of growth that genuinely supports attractive returns.
However, this fundamental can often be lost sight of amidst the herd mentality and seemingly easy returns on offer from the soaring share prices of acquisitive businesses.
In the tech sector businesses like Xero Limited (ASX: XRO), Altium Limited (ASX: ALU) and Afterpay Touch Group Ltd (ASX: APT) appear to be delivering the strongest organic growth and as such I'd prefer them over WiseTech.
