One of the best-performing TSX tech stocks in the last decade is Descartes Systems (TSX:DSG). Since the end of February 2014, the stock has returned 654% to shareholders, much higher than the 474% returns generated by iShares S&P/TSX Capped Info Tech ETF.
As past returns don’t matter much to current or future shareholders, let’s see if you should own Descartes stock at the current valuation.
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An overview of Descartes Systems
Valued at a market cap of $9.93 billion, Descartes Systems offers an enterprise-facing logistics platform that combines the most expansive logistics network in the world with a broad array of logistics management applications, in addition to trade-related intelligence.
Basically, Descartes leverages technology to simplify complex business processes. It is focused on logistics and supply chain management business processes and offers a portfolio of cloud-based solutions that improve the productivity and security of logistics-intensive businesses.
According to Descartes Systems, logistics-intensive businesses are looking to reduce operating costs, improve margins, and serve customers efficiently. The rise in the number of business partners in a company’s supply chain has risen in recent years, making trade and transportation processes complex to manage.
The rise of e-commerce has also heightened challenges for suppliers and end-customers who are demanding narrower order-to-fulfillment periods at a lower cost, in addition to flexibility with rescheduling.
Over the years, Descartes Systems has successfully optimized the supply chain of its enterprise partners. With more than 24,000 customers, Descartes has increased its sales from US$348 million in fiscal 2021 (ended in January) to US$486 million in fiscal 2023. In the last 12 months, it has reported revenue of US$550 million.
How did Descartes Systems perform in fiscal Q3 of 2024?
In the fiscal third quarter (Q3) of 2024, total sales rose to US$144.7 million, up from US$121.5 million in the year-ago period. However, an increase in operating expenses and other charges meant the company reported an operating profit of US$32.4 million in Q3, compared to US$34.8 million in the same period last year.
Descartes Systems stated its revenue growth in Q3 was driven by service sales from new and existing customers, which contributed an additional US$10.6 million to the top line.
In early 2023, Descartes also acquired Windigo Logistics, a cloud-based provider of final-mile carrier solutions, for $136.8 million. In April 2023, it acquired the assets of Localz for $5.9 million, which is a cloud-based customer engagement platform operating in the order management segment.
Is Descartes Systems stock undervalued?
Analysts tracking Descartes Systems stock expect sales to rise to US$571 million in fiscal 2024 and US$627 million in fiscal 2025. Its adjusted earnings per share is forecast to expand from US$1.18 per share in 2023 to US$1.68 per share in 2025.
So, priced at 11.7 times forward sales and 51.5 times forward earnings, which is quite steep. Moreover, analysts expect adjusted earnings to touch US$3 per share in fiscal 2028. So, if DSG stock is priced at 40 times forward earnings, it should surge to US$120 in the next three years, indicating an upside potential of 40%. Analysts remain bullish and expect the TSX tech stock to surge 5% in the next 12 months.
