Written by Puja Tayal at The Motley Fool Canada
Tech stock investors have been waiting almost two years to recoup their losses from the 2022 tech bubble burst. This bubble burst, as central banks worldwide pulled out stimulus money from the economy. The market might remain tepid throughout the year before a bull market begins. Some economists are even expecting a recession. In this economic uncertainty, one tech stock is a screaming buy, as it has the potential to bounce back and grow higher in a bull market.
A tech stock you will be glad you bought before the bull run
The stock I am referring to is Descartes Systems (TSX:DSG). Let’s look at this stock from three angles: stock price momentum, revenue and profit growth, and secular trends in logistics. A little historical data and expectations of the future will tell you why this stock has bounced back in all economic downturns over the last 23 years.
Revenue and profit growth of Descartes Systems
Descartes Systems helps companies optimize their logistics and supply chain management. Over the years, it has helped companies transport goods, services, and information via air, sea, road, or rail. From custom compliance to route planning and optimization to transport intelligence, Descartes offers solutions for one consignment or a complete package. With globalization, trade is getting more complex, making Descartes’s offerings sticky. And that is visible in its earnings.
Adjusted EBITDA Margin
After every global crisis, Descartes adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins improved. That is the benefit of scaling in a software-as-a-service (SaaS) setup. Irrespective of the economic situation, its revenue and EBITDA growth are positive, hinting at the resilience of its business model.
Secular tech trends in logistics
To understand the business model of Descartes, you need to understand the importance of logistics. Trade happens at local, regional, national, and international levels. Multiple parties are involved in sending a consignment: manufacturers, freight forwarders, customs, and intermediaries. Descartes connects with the Global Logistics Network through its platform and standardizes the procedure and communication, so everyone is on the same page.
Moreover, the ever-changing trade regulations like free trade agreements and tariffs make it even more important for companies to use logistics services to ensure smooth transit.
Descartes also provides supply chain management solutions like sourcing, procurement, conversion, and storage of resources. This segment benefitted as the Russia-Ukraine war disrupted the global supply chain. Currently, global trade is seeing a remarkable shift from the West to the East, as Western companies look at the East for manufacturing and consumption. Descartes is seeing growth in global trade intelligence, routing, and transportation management solutions.
It has several secular trends in logistics up its sleeves, like e-commerce, autonomous trucks, drone delivery, autonomous warehousing, and larger economic corridors for freight forwarding. All these trends will drive demand for technology-driven solutions that can make logistics more cost effective and efficient. Descartes is acquiring smaller software companies to enhance and add to its offerings.
As it sells each of its offerings separately and as packages, it even cross-sells products.
The tech stock’s price momentum
Profit growth and secular trends are reflected in Descartes’s stock price.
After falling 23% in the second half of 2018 because of the U.S.-China trade war, the stock surged 70% next year. That time, it saw a surge in demand for its custom solutions.
Even in the 2020 pandemic, the stock fell 29% in less than a month and surged 140% in 20 months.
In the Russia-Ukraine crisis of March 2022, the stock fell 20% in a month and surged 40% in less than a year. It is because North America became the largest liquified natural gas exporter.
Fears of a recession could pull the tech stock down 15-20%. That would be an opportunity worth grabbing. Even now is a good time to buy the stock, as economic uncertainty prevented it from climbing significantly. Once the market bulls charge, they could send Descartes stock soaring upwards.
The post 1 Tech Stock You’ll Be Glad You Bought When the Bull Market Starts appeared first on The Motley Fool Canada.
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