Tech stocks‘ asset-light model and ability to scale help them generate strong growth. However, they are also volatile due to the ease of changing subscription plans. Supply chain management systems provider Descartes Systems (TSX:DSG) could face similar volatility as tariff wars slow trading activity. Its stock price fell more than 14% after the company announced its first-quarter earnings.
Three things you should know about this tech stock
Although the company reported strong earnings growth, its cost-cutting initiative triggered a decline in share price. Many investors have cold feet and are procrastinating buying the stock as it falls. Here are three things about Descartes that will give you the confidence to buy the dip.
1. Descartes Systems is well-positioned to help companies adapt to trade uncertainty
The company offers logistics and supply chain management solutions to companies with logistics needs. Its business model gives clients the flexibility to use just one service or an end-to-end solution for a single consignment or all their consignments, domestic and international. Its wide range of service offerings keeps it relevant in every situation.
In the first quarter, its revenue surged 11.5% year over year due to strong demand for three services:
- MacroPoint free visibility solution that helps companies track domestic transportation.
- Global Trade Intelligence solutions that give companies real-time insights into tariff changes.
- Customs and regulatory compliance solutions that help companies complete customs checks.
Chinese e-commerce companies used the Type 86 filing mechanism to ship goods under $800 to the United States tariff-free. These tariff exemptions ended on May 2, reducing revenue opportunities. However, it opened another opportunity under Type 11 or Type 1 filings that allow Chinese goods to come to the U.S. after paying tariffs.
This shows that Descartes will continue to earn revenue. Then why is the company cutting costs?
2. Descartes’s cost-cutting initiative: A positive for shareholders
Descartes is cutting costs by laying off 7% of its workforce. It will incur a restructuring charge of around $4 million in the second quarter and expects to achieve annual cost savings of $15 million. This move comes as global trade uncertainty is affecting customers’ decision-making and reducing shipment volumes in the U.S.-China trade and West Coast ports.
Descartes did not report any significant customer contract cancellations, but it is better to be prepared for a temporary slowdown. The company wants to maintain its 10-15% adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth. While it cannot control revenue, it can control cost — hence, the cost cut.
The company has undertaken such measures in the past to sustain adjusted EBITDA.
3. Descartes is well-positioned to tap acquisition opportunities
The short-term slowdown will not deter Descartes from pursuing growth through acquisitions. It is debt-free, has a cash reserve of $175 million, and an undrawn line of credit of $350 million, which positions it well to fund any acquisition opportunities.
The company can tap the surge in trade volumes once the tariff situation eases. Even if tariffs lead to a structural shift in the global supply chain, Descartes could facilitate the shift with its Global Logistics Network. It has benefited from the shift in the oil and natural gas supply chain after sanctions on Russia.
Investor takeaway
The trade war and the recent dip have created a value opportunity to buy a resilient growth stock at a reasonable forward price-to-earnings ratio of 46.3 — its lowest in 15 months. The trade recovery could accelerate earnings growth and drive the stock up. While no one can time the recovery rally, you can be assured that it will come when tariff concerns ease.
