Descartes Systems Group (TSX:DSG) has been a top technology stock on the TSX for years. Its stock is up 92% in the past five years, 618% in the past 10 years, and 2,480% in the past 15 years.
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Descartes: A great business and a great long-term stock
Descartes is leading global provider of transportation and logistics software solutions. It operates a logistics network that connects thousands of businesses across the global supply chain. This network is a fundamental asset that accommodates global trade.
Descartes has intelligently complemented this asset by acquiring a wide mix of complementary SaaS (software-as-a-service) solutions. These help make trade more compliant, efficient, and profitable for all providers.
In many of its services, Descartes uses machine learning and artificial intelligence to help customers keep track of shipments, route couriers, maintain compliance documents, and manage inventory.
Often, its solutions are replacing cumbersome paper processes. Once its solutions are adopted, there is no going back to the old processes.
A high-quality business
Descartes is to the global supply chain like Visa is to global commerce. It provides the integral network that accommodates trade around the world. As a result, it has a high customer retention rate and high (93%) recurring service revenue.
Descartes has grown revenues by a 14% compounded annual growth rate (CAGR) over the past decade. Its earnings before interest, tax, depreciation, and amortization (EBITDA) have grown by an even faster 17.5% CAGR in that time.
Descartes is a very pricey stock given near-term challenges
Such strong performance has come with a downside for Descartes. Its valuation has risen considerably over the past decade. It trades with an enterprise value (EV)-to-EBITDA ratio of 32 times and a price-to-earnings (P/E) ratio of 62 times.
This is part of the reason for Descartes’ uncharacteristic stumble. Its stock is down 13% for the year and 15% in the past six months. So, what’s going on?
Descartes is caught in the crossfire of Trump’s global trade war. Companies have slowed decision-making around trade, cross-border shipments, and supply chains. They are waiting for stability in the market. That impacts demand for Descartes services. It could impact its growth outlook for 2025.
The company proactively reduced its workforce by 7% given the environment. This concerned the market to an extent and the stock took a hit after it released first quarter earnings.
Buy today or wait for another opportunity?
So the question is whether Descartes Systems looks attractive today? Certainly, its valuation has come down. It was trading with an EV/EBITDA ratio of 40 at the start of the year. Today, it is down 8 to 32.
Yet, it is still an extremely pricey stock. It trades just over its long-term valuation mean of 31. To justify its current valuation, Descartes needs to maintain its 12–15% annual growth rate for many years to come. There isn’t a huge margin for safety in the stock price.
If you believe this company can continue to hit its growth targets, it is probably not a terrible time to add to the stock. However, I would look for a greater pullback to make a significant addition. It’s a great company, just not a great price to pay for it right now.
