WiseTech Global Ltd (ASX: WTC) has recently enjoyed a stellar run, with cashflow up 132.9% and earnings up 106.8% respectively in the previous 12 months. The company, however, is currently trading at an astronomical P/E ratio of 118, which may give pause to even the most risk-happy investor.
Despite its strong financials, it is my view that there are lingering questions about WiseTech’s future, and whether it is a buy at its current price.
What do WiseTech Global do?
Wisetech is essentially a developer of cloud-based software solutions for the global logistics industry. If this seems a little incomprehensible to you, you aren’t alone. In simpler terms, the company creates software programs that manage the transportation, delivery, warehousing and other logistical concerns involved when businesses move either goods or information.
An effective software program in the logistics arena will deliver more profitability for the firms that use it in the form of increased efficiency and productivity. According to Wisetech, the company’s flagship program (CargoWise One) does just that.
As mentioned above, WiseTech’s financials, particularly in the last 12 months, have been cause for elation on the part of the company and investors alike. Wisetech has delivered a one-year shareholder return rate of 126.9%, with astronomical growth in the last few months in particular. The company is clearly finding clients who believe in the software’s ability to deliver value, and that is reflected in Wisetech’s strong performance.
Barriers to Entry
One concept of the ideal company is a strong performer in an industry with high barriers to entry. For example, look no further than the stalwart CSL Limited (ASX: CSL).
In my view, there is an issue in the software industry over relatively low barriers to entry. Wisetech has spent a considerable amount in R&D, but that does not change the fundamental truth that the software industry is one with relatively low barriers to entry. Software development is democratised, and there is very little to stop disruptors from entering the game.
As a corollary of the above point, there are also no geographical barriers to entry in software. Wisetech’s target clients are firms with multi-national operations. This means that Wisetech needs to compete with software producers not just in Australia but across the entire world. As international business operations grow, so too does the competition in the industry. Notwithstanding Wisetech’s performance to date, it is useful to keep this in mind.
Although P/E ratio does not tell the whole story, in my view WiseTech’s P/E of 118 (the average P/E of the software & services sector is 28) merits further inquiry. This number is obviously a reflection of the market’s sentiment regarding the future of the company, but I would argue that there is a willingness on the part of the market to overestimate the potential of tech companies in particular.
Look no further than the ignominious performance of GetSwift Ltd (ASX:GSW), although unlike Wisetech this company never had any revenues or profits to speak of.
GetSwift is another logistics software company whose share price raced to a 52-week high of $4.60 on the back of investor excitement about the burgeoning logistics industry before a spectacular crash to its current value of $0.30 when it became clear that investor enthusiasm had vastly outpaced reality.
I am not suggesting that WiseTech is the next GetSwift; this is simply a cautionary tale regarding the market’s enthusiasm for companies of this kind.
WiseTech’s strong financials and performance have made it a very attractive and rewarding prospect for investors. However, before deciding to buy, prospective investors should take heed to consider the merits of the company itself, and not be swept up into the market’s evident enthusiasm for the next big tech company.
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Motley Fool contributor Tom Clelland has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.