Shares of Descartes Systems Group (TSX:DSG)(NASDAQ:DSG) are trading at $57.3 at writing. The stock has gained 61% in 2019, easily outperforming broader indices. DSG has returned over 230% over the last five years.
The company has managed to create significant investor wealth for investors over the years. However, its rapid rise in market value has meant that the stock is currently trading at a premium.
DSG is valued at $4.7 billion
Descartes Systems Group is a Canadian-based company that provides cloud-based logistics and supply chain software services to enterprises. DSG is valued at $4.7 billion in terms of market cap, or 11 times forward sales.
It has a price to sales ratio of 12 and is trading at a forward price to earnings multiple of 70.
While analysts expect DSG sales to rise 18.6% to USD $326.4 million in fiscal 2020 (year ending in January), this growth is expected to decelerate to 10.8% in 2021. Comparatively, its earnings per share are expected to grow at an annual rate of 19.7% over the next five years.
Looking at DSG’s estimated growth rates, we can see that the stock is overvalued and due for a correction. Like most other technology stocks, DSG will severely underperform the broader markets if recession fears come true in CY 2020.
Solid long-term bet
While DSG stock might be vulnerable in a downturn and has near-term valuation concerns, the company has strong fundamentals. It’s one of the leading companies to provide SaaS (software as a service) solutions for logistics-intensive businesses.
DSG has an employee base of 1,500 and a global presence in Canada, the U.S., EMEA, South America, and the Asia-Pacific. Descartes has a base of over 20,000 customers across 160 countries.
Its customer base includes Home Depot, DHL and Delta Airlines among many others. Home Depot leverages DSG’s home delivery solution for real-time delivery appointment scheduling, route optimization & execution, and mobile resource management solutions.
DHL uses DSG tools for logistics and supply chain management while Delta Airlines has several country-specific customs and security filing procedures. It also needs to provide cargo tracking for timely delivery.
The global trade scenario is becoming increasingly complex as compliance requirements continue to take utmost precedence providing an opportunity for DSG.
The company’s solutions help retailers and logistic providers with real-time delivery route optimization and execution solutions, helping them to fight off competition from online retailers like Amazon and eBay.
DSG has focused on a recurring revenue model and has managed to deliver profitable growth with positive free cash flows. Earlier this year, the company raised USD $245 million in equity capital to fund growth opportunities and acquisitions. Since 2014, DSG has acquired 22 companies and spent $780 million for these acquisitions.
DSG has experienced strong and consistent revenue growth over the years. It has improved margins through a focus on cost controls and operational efficiencies. Investors need to look at an opportune moment to buy the stock when it is trading at a more reasonable valuation.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Delta Air Lines. The Motley Fool recommends eBay and Home Depot and recommends the following options: long January 2021 $18 calls on eBay, long January 2021 $120 calls on Home Depot, short February 2020 $205 calls on Home Depot, and short January 2020 $39 calls on eBay. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.