Welcome to ‘Stock Teasers’, where we aim to provide investment research on a wide range of topics. In this edition, Cross-Border Stocks, we spotlight one Canadian stock and one US stock, regardless of sector or size. Let’s dive in!

Canadian Stock: The Descartes Systems Group Inc. (DSG)

DSG is a global leader in on-demand software solutions that focuses on improving productivity, reducing costs and enhancing the security of logistics-intensive businesses. The main focus is on serving transportation providers (air, ocean, truck) logistic service providers (third-party logistics, freight forwarders, and customs brokers), distribution-intensive companies including retailers, and distributors for which logistics is a key part of their own product/service offering. DSG is one of the few high quality Canadian tech stocks and it has done an excellent job using acquisitions to drive growth being a long-term compounder.

In terms of its financials, its most recent results caused the stock to drop initially. Revenue grew 11% to $151.3 million, in line with estimates, and EPS of $0.43 slightly missed the estimates of $0.47. The balance sheet is strong with a net cash position of $231 million and DSG’s acquisition pipeline remains strong. DSG has historically traded at a premium valuation, currently above 50x forward earnings due to its attractive fundamentals. At these levels, reaction to quarterly results tends to be sensitive, although, the stock has recovered from the initial sell-off when these results were released. The company also does not pay any dividends.

We can see that valuation has come down recently as DSG continues to meaningfully grow earnings. The bottom pane of our chart displays the steady increase in EBIT, EBITDA, and net income over time. While DSG does not have a great history of beating EPS estimates, we think it will continue to meaningfully grow through its acquisitive model. While expensive, the premium valuation is warranted for numerous reasons discussed.

US Stock: Spotify Technology (SPOT)

SPOT is the well-known worldwide audio streaming subscription services company. The company operates through two segments being: Premium and Ad-Supported. SPOT of course has the user base to be successful, but profitability has been the pain point for investors over the years.

Its growth has continued to be solid at 14% over the last twelve months. The stock recently jumped after Q2 earnings recorded a large beat on EPS (1.33 euros vs. estimates of 1.05 euros), while revenues were also largely in line with expectations. SPOT highlighted its efficiency plan to rise prices of premium subscription plans, reduce headcount, and separating music-only and audiobook-only subscription plans. These will help expand profitability meaningfully in the future, hopefully leading to similar large EPS beats.

Looking at its financials we see the struggling profitability trends. The valuation is expensive at 40.4x forward earnings, but we can see how this has contracted over the last few years as analysts have become increasingly positive on the business’ profitability. Additionally displayed is momentum in EPS beats potentially starting to pick up. While SPOT is not cheap, the company has exceptional reach with U$13.8 billion in revenue over the last-twelve-months. As efficiency improves, we think the fundamentals could become very attractive. 

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 Employees, directors, officers, related companies, the i2i Fund and/or partners of 5i Research have a financial or other interest in SPOT at the time of publishing.