WiseTech Earnings: Countercyclical Investment Supports Continued High Returns

We raise our fair value estimate for narrow-moat WiseTech WTC by 6% to AUD 95 per share following full-year results. WiseTech reported revenue growth of 29% and EBITDA growth of 21%, both slightly exceeding our expectations. Shares dropped around 20% during the day, which we believe is due to management guidance on revenue and EBITDA growth for fiscal 2024 coming in below market expectations. However, we view the guidance as constructive and have revised our forecasts accordingly. At current prices, WiseTech shares screen as materially undervalued.

What impressed us most about the result is WiseTech’s continued ability to generate high returns on its investments. WiseTech estimates that it achieved a Rule of 40 score of 65 in fiscal 2023, which it calculates as the sum of year-on-year revenue growth and free cash flow margins. The score was up 2 points from fiscal 2022 and well above the benchmark score of 40.

However, our preferred metric for assessing business efficiency in SaaS companies is payback time on investment. Although the Rule of 40 does a decent job of balancing growth and profitability, it doesn’t accurately reflect the time it takes for some investments to generate a return. For example, the Rule of 40, which is most applied to horizontal SaaS companies with short sales cycles, unfairly punishes vertical SaaS companies focused on enterprise businesses, like WiseTech, which have relatively long sales cycles. Similarly, expenditures on product development, both expensed and capitalised, will also usually only generate returns well beyond the year in which the cash has flowed out of the business. For WiseTech, we, therefore, monitor the time it takes to generate enough incremental organic revenue to pay back the sum of last year’s investment into sales and marketing, and product design and development (both expensed and capitalised).

WiseTech’s payback time on investment remains among the best in the world and continues to exceed our expectations.