SPS Commerce: Connecting the Retail Supply Web

In modern commerce, managing supply chain networks is a complex, challenging business problem.

Exchanging purchase order or invoice data in a compliant manner, tracking order and shipment status, integrating both suppliers and retailers' back-end ERP and warehousing systems, onboarding new providers or customers, optimizing through analytics, and scaling operations are just some of the supply chain challenges faced by modern companies. These tasks become even more challenging when a single supply chain involves multiple tiers and dozens of companies, some operating in different countries with different laws, languages, and currencies.

Nevertheless, managing complex supply chains is a key risk, and doing it well can be a competitive advantage that allows companies to generate better gross margins and move inventory faster. This can be the difference between success (Best Buy is a notable example) and bankruptcy-level failure (Circuit City failed largely due to inventory management).

In today's Green Screen stock review, I'm going to take a look at a company dedicated to helping automate and ease the challenges listed above. The company is SPS Commerce (SPSC). Does it meet the criteria for a "green dot" stock? Let's find out!

The Business of SPS Commerce

SPS Commerce operates a large retail network of suppliers, retailers, and logistics providers (warehousing, shipping, etc.). At each end, companies use SPSC's software-as-a-service (SaaS) platform to file purchase orders, send invoices, process shipping instructions and confirmations, track orders in real-time, etc. By having everything on one platform, many of the challenges of communication and consistency are solved.

The platform also provides advanced analytics tools for its members to gather actionable insights to optimize their operations. For example, these tools can help calculate sell-through rate, in-stock percentage, return rate, pinpoint current or potential inventory issues, track promotions and seasonality, and so forth.

Close to 90% of revenue is generated from platform usage. The bulk of this comes from subscription fees for access to the network and the software platform, with costs based on usage and features. There are also one-time fees for initial onboarding, as well as for each trading partner you want to add. Value-added services, such as automated compliance monitoring, or outsourcing your entire supply chain operation to SPS, are also offered.

Remaining revenue primarily comes from fees for adding advanced analytics capabilities. This is also a subscription-based fee charged monthly or annually.

SPS Commerce's network currently includes close to 50,000 customers. Most revenue (~84%) comes from customers in the United States, with 16% from international clients.

Is Revenue Growing and Recurring?

The company itself calculates that 94% of revenues come from recurring sources - primarily the subscription fees outlined above. Clearly, this fits our "recurring revenue" requirement.

Growth, too, has not been an issue. SPSC's 3-year revenue CAGR is 18.3%, and analysts expect this figure to continue at a 14-16% annual pace through 2029. The company has an excellent track record of growth, with Q1 of 2025 representing its 97th consecutive growth quarter.

Growing within their existing base of large clients has been the primary growth strategy, with average revenue per customer swelling 15% in 2024. Acquisitions have also added to the customer base.

From a big-picture perspective, management estimates its global total addressable market at $11.1 billion, with $6.5 billion of that in the U.S. It also estimates its total potential customer base at about 275,000, with an average revenue figure of $40,500 each. Now compare that against current company numbers of $760 million in annual revenue, ~46,000 customers, and $13.3k annual revenue per client. I'd say there are plenty of growth legs left in this one!

What About a Moat?

I see a few moat characteristics in SPS Commerce.

The first, clearly, are NETWORK EFFECTS. It operates one of the biggest retail supply chain networks in the world, with some huge endpoints including Walmart, Target, and Amazon. As more retailers and suppliers join, it becomes more valuable for others to connect, as the supply and/or demand generated from it becomes irresistible to new clients, and makes it very difficult for existing clients to drop it. Network effects are some of the strongest moat characteristics a company can have.

I would also argue there are substantial SWITCHING COSTS. One, because of the network advantages just outlined. Two, because SPS's SaaS platform integrates deeply into critical supply chain operations and complex ERP systems. It simply becomes a key piece of software in critical business functions, something companies are very loath to disrupt. Once in place, SPS's platform becomes extremely hard to dislodge.

Finally, there is somewhat of a BRAND ADVANTAGE here as a "default choice" for supply chain management. SPS's network is the largest of its kind in the U.S., with most of the country's largest retailers already on it. When a new retailer or supplier is looking to solve this business problem (or an existing one is revamping its operations), SPS becomes an easy option for solving the supply chain management question.

No issues here, SPS Commerce has several very powerful economic moat characteristics.

Management and Finances

SPS is run by Chad Collins, who was appointed CEO in October of 2023. He succeeded long-time CEO Archie Black, who turned the company around from near-insolvency in the early 2000s. Black is still with the firm as Executive Chairman.

Collins has a solid resume, with over 20 years of executive experience in the supply chain software space. He has only been at the helm for 2 years, so there isn't much track record here yet. However, the company continues to get accolades for a "transparent and inclusive" culture, with employee ratings consistently putting the company in the top 5% of its peers.

Financially, I have no concerns. SPS has a debt-free balance sheet, despite a history of acquisitions. Free cash flow margins have remained steady, in the low 20% range over the past 5 years. As I mentioned, the company is more aggressive with acquisitions than I generally like to see, leading to return on investment figures that are lower than the average SaaS company. But they are still plenty acceptable at 15-20% annually.

Risks

I would categorize SPS Commerce as a "medium-low" risk compared to our average pick here on GreenDot.

The biggest business risk I see is tied to the company's penchant for acquisitions. Small, strategic ones (as has been the history here) don't concern me too much, but should the firm decide to go bigger and take on substantial debt, it would be concerning. Collins is still pretty new as CEO, so it is difficult to ascertain what his long-term strategy is.

There are the typical SaaS risks here as always. Security breaches, system outages, poor quality of service, etc., are operational "blocking and tackling" that the company has to hit on a day-to-day basis. Issues with any of these could lead to a loss of customer trust and, should they persist, business.

For investors, probably the biggest risk is valuation. This has been a richly valued stock throughout much of its public history. Buying at too high a valuation will lead to mediocre returns no matter how well the company executes.

Conclusion

I think it's pretty clear that SPS Commerce is a great business that meets all of our "green dot stock" criteria. It has a highly recurrent revenue model growing at solid rates, a big market opportunity, very strong economic moat factors, good financials, and an enviable company culture. I'm adding it to the Watch List today.

Now, let's look at pricing. The stock currently trades around $145 per share. I've modeled growth at around 13% annually over the next 5 years, with a 21.5% free cash flow margin, and about 1% annual share dilution (all in line with historical norms). The discount rate is set to my "par" number of 10.5%. That gives me a target price of $120 per share. We will park it for now and look for a better entry point going forward.