Cloud-based logistics software developer WiseTech Global Ltd (ASX: WTC) was the darling of many investors’ portfolios throughout 2017. Its share price rose over 150%, driven mostly by market excitement around the company’s aggressive M&A strategy. WiseTech successfully acquired 11 companies in 2017 alone. Its share price chart over that time is the sort of thing investors dream about: it barely faltered in its upward trajectory – and the price looked set to keep climbing into the stratosphere. But this business model also led to its undoing. In February its share price collapsed – which on the surface seemed pretty…
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Cloud-based logistics software developer WiseTech Global Ltd (ASX: WTC) was the darling of many investors’ portfolios throughout 2017. Its share price rose over 150%, driven mostly by market excitement around the company’s aggressive M&A strategy.
WiseTech successfully acquired 11 companies in 2017 alone. Its share price chart over that time is the sort of thing investors dream about: it barely faltered in its upward trajectory – and the price looked set to keep climbing into the stratosphere.
But this business model also led to its undoing. In February its share price collapsed – which on the surface seemed pretty surprising. WiseTech had just announced that half yearly revenues were up 31% to $93.4 million versus first half FY17, net profit was up 8% to $15.6 million. The company also announced it was on track to hit its full year FY18 target guidance. The problem was that investors wanted more.
When WiseTech snapped up Australian warehouse management software provider Microlistics in December 2017, CEO Richard White claimed it would boost productivity and deepen the company’s warehouse capabilities.
Similarly, when WiseTech bought two Dublin-based European customs solutions providers, White stated that the acquisitions would give the company the ability to provide logistics and supply chain management services to clients now having to deal with the complexities of international trade in post-Brexit Europe.
But investors didn’t really see this reflected in WiseTech’s results. Sure, revenues and profits were all increasing, but WiseTech was merely hitting the targets it had set for itself before all these acquisitions had taken place. This either meant that the profitable synergies White had anticipated weren’t materialising, or that WiseTech’s underlying organic growth was actually lower than anticipated. Either way, investors got nervous and started jumping ship.
And they left in droves: in less than two months WiseTech shed close to half its market capitalisation. But those shareholders who stuck it out – or even decided to top up their holdings on the downturn – have been rewarded with a serious change in fortunes. Since early April, the share price has been on a tear, shooting up over 70% and even hitting an all-time high of $17.67 on 22 June.
A couple of things probably contributed to this stark turnaround. Firstly, that guidance update that the market was craving finally arrived. At its investor conference at the beginning of May, WiseTech announced that it now expected revenue growth for FY18 to be in the range of $210 million to $220 million, or 37% to 43% over the prior year. This was up from the $207 million to $217 million it had originally forecast.
Secondly, the company showed that it wasn’t going to let this blip in its share price deter it from continuing to pursue its M&A strategy. For better or worse, Richard White seems intent on empire-building. Since the beginning of May, WiseTech has acquired leading Turkish logistics provider Ulukom, American freight and transport management company SaaS Transportation, and US-based parcel shipping firm Pierbridge.
This continued activity at least keeps investors interested, but WiseTech must show that it can convert these acquisitions into meaningful profits. The risk with a company like WiseTech that pursues such a bold business strategy is that investors will be quick to dump it if they don’t see signs that it’s living up to its growth potential – and this is precisely what played out back in February. It makes WiseTech a risky company to hold, but still one worth adding to your watch lists.
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Motley Fool contributor Rhys Brock owns shares of WiseTech Global. 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.