This Tech Stock Benefits From a Global Recovery

Tech stocks like Descartes Systems Group (TSX:DSG)(NASDAQ:DSGX) should benefit from the global recovery.

| More on:

The global economy is rebounding sharply this year. As borders and physical stores reopen, people can finally spend all the discretionary income that’s been piling up. Households across the world are sitting on excess savings after a year of government stimulus and lack of spending opportunities. 

This recovery will be reflected in the supply chain, which is why supply-chain management software is probably an ideal sector to bet on in 2021. My top pick is Descartes Systems Group (TSX:DSG)(NASDAQ:DSGX

After a long period of consolidation, Descartes finally seems to be recovering. The stock is up by 19% year to date and looking increasingly bullish, as investors take note of its long-term prospects and growth metrics. Here’s a closer look. 

Descartes’s prospects

Renewed investor interest is based on the fact that the company’s supply chain management solutions are eliciting stronger demand. Auto manufacturers, factories, airlines, and other industries with complex logistics are increasingly using the company solutions to fine-tune their supply chain operations.

Additionally, Descartes is positioned to become a major player in e-commerce logistics and fulfillment segments, given the strong demand for its supply chain solutions. Likewise, the company should continue to see revenue growth as long as people, goods, and information are in transit from one place to another.

Analysts expect earnings to grow by 20% annually over the next five years. Descartes should achieve this relatively high growth target given its increased focus on high-margin services revenue. Additionally, it is increasingly pursuing strategic acquisitions. Last year, it acquired three businesses, all strengthening its core offerings and competitive edge.

Valuation

Descartes’s revenues in its most recent quarter were up 18% year over year to $98.8 million, topping analysts’ estimates of $92.2 million. Net income nearly doubled to $18.4 million, or $0.21 a share, compared to $11 million reported a year ago.

After the recent pullback, Descartes is not cheap as it is trading with a price-to-sales multiple of 20 and price-to-book multiple of seven. However, a rich valuation is expected of a high growth stock well positioned to generate above-average financial growth.

That being said, Descartes is a smart bet for investors eyeing exposure to the global trade recovery. The company is well positioned to generate long-term value, given that about 90% of its revenue is recurrent.

Bottom line

Global demand collapsed last year. Meanwhile, excess savings has created pent-up demand. In 2021, the recovery of the global economy and global trade is the key theme. Software provider Descartes is at the epicentre of this trend. 

Suppliers are looking for ways to fine tune their supply chain and reduce costs, as they struggle to keep up with demand. That should boost demand for Descartes’s systems. The company already seems to be outperforming by beating analyst expectations. 

While the stock is overvalued, if near-term growth rates are stronger than expected, the company could justify its premium. Long-term investors eyeing the global economic recovery should keep this stock on their watch lists for now. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. 

More on Investing

A data center engineer works on a laptop at a server farm.
Tech Stocks

3 No-Brainer Data Centre Stocks to Buy With $500 Right Now

Data centres are going to be a huge growth opportunity in the next decade. And these are the top buys.

Read more »

Paper Canadian currency of various denominations
Bank Stocks

1 Magnificent Canadian Dividend Stock Down 28% to Buy and Hold for Decades

This top Canadian dividend stock is underperforming its large peers this year, but a turnaround could be on the horizon.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

hand stacks coins
Investing

Secure a Wealthy Future With These 3 Canadian Stocks

These Canadian stocks have the potential to appreciate substantially over time and may also enhance returns through dividend payments.

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

analyze data
Investing

3 Blue-Chip Stocks Every Canadian Should Own

These blue-chip stocks are backed by large-cap companies with well-established businesses, solid fundamentals, and a growing earnings base.

Read more »

dividends grow over time
Stocks for Beginners

The Smartest Growth Stock to Buy With $2,000 Right Now

Do you have $2,000 to invest for the long term? These three TSX stocks have and will continue to deliver…

Read more »