The WiseTech Global Ltd (ASX: WTC) share price has fallen 23% since last month, to just $26.84 at time of writing. Yet it seems it still has further to go. What has led this company to take the spot of the world's most-expensive tech company this year? And why has its investment performance suddenly plummeted?
Let's break it down.
The product
Logistics are tricky. Internationalisation has allowed businesses to specialise and benefit from economies of scale, and as a result, the process of manufacturing and delivering products to the end consumer has grown more complex.
This is where WiseTech comes in. Its flagship product, CargoWise One, allows users to manage operations on a single database. Its feature-rich platform can be tailored for its customers' supply chain and provide anything from customs brokerage, HR management to online tracking and tracing.
As a testament to the effectiveness of the product, CargoWise One has a 99% retention rate. WiseTech serves 12,000 companies globally which includes 19 of the 20 largest third-party logistics providers.
Interestingly, CargoWise One is not a traditional software-as-a-service (SaaS) product. Rather than charging a subscription fee, WiseTech generates revenue depending on the customer's utilisation of the software. This means WiseTech grows with its customers and is also exposed to growth in world trade and strong market environments.
The news
Recently, WiseTech has been accused by Chinese-firm J Capital (JCAP) of overstating its revenue in Europe by $48 million. According to JCAP, this overstatement was overlooked by auditors because it was channelled through Australian subsidiaries.
But wait, that was only report one. Report two pointed our attention towards the poor performance of WiseTech's acquisitions. This included the failure of newly acquired companies to convert customers onto the CargoWise platform. According to JCAP, customer churn rates on these subsidiary platforms were only at 50% showing the underperformance of these expensive assets.
These are hard hits to take. We're earnestly awaiting WiseTech's response to this second report.
Foolish takeaway
Despite these allegations, WiseTech hasn't changed its 2020 guidance. The company confirms that revenue for the following year will be between $440 to $460 million. Earnings before income, tax, depreciation and amortisation is forecasted at $145 to $153 million. This has helped to tame key investor concerns.
Similarly, WiseTech's FY19 results are undeniably a success. It achieved a 49% compound annual growth rate over the last 4 years and maintained a relatively strong profit margin of 48%. It continues to spend in areas of R&D and talent, typical for a company in its growth phase.
Despite trading on a 23% discount on last month's valuation, WiseTech is still ridiculously expensive. Although I strongly believe it solves critical problems in supply chain logistics, its 151x price-to-earnings ratio is quite steep.
I'll be keeping my eyes peeled though.
