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**TL;DR:** SPS Commerce (SPSC) is the digital plumbing that connects retailers like Walmart and Target to their 300,000 suppliers. 96% recurring revenue, 100 straight quarters of growth, $147M net cash, management buying back shares aggressively. The stock cratered 59% because Amazon policy changes are causing 4,000 small suppliers to churn from one acquired segment. I think Wall Street is overreacting to a temporary cleanup operation. Trading at $51 vs. intrinsic value of $65.59 (22% margin of safety).
## The Business
SPSC runs the digital toll bridge for retail supply chains. When a supplier wants to sell to Walmart or Target, they need a standardized way to exchange order data, invoices, and shipment info. That's EDI (Electronic Data Interchange), and SPSC handles it in the cloud.
What makes them sticky is the network effect. They have 300,000 trading connections. Once a supplier integrates SPSC into their ERP system, ripping it out to switch to Oracle or TrueCommerce is a nightmare. 96% of their revenue is recurring subscriptions.
## The Numbers
| | |
|---|---|
| Operating Cash Flow | $194.44M |
| Stock-Based Compensation | -$57.93M |
| Smoothed CapEx (5yr avg) | -$29.19M |
| WC Adjustment | +$46.75M |
| **Owner Earnings** | **$154.07M** |
| Diluted Shares | 37.52M |
| **OE Per Share** | **$4.11** |
CapEx is minimal (3.83% of revenue) because this is pure software. No factories, no warehouses.
**Quality metrics:**
- Gross Margin: 64.33%
- Recurring Revenue: 96%
- Net Cash: $147.65M (debt: $6.62M)
- Buybacks TTM: $121.4M
## Why It's Cheap
The stock dropped 59% in a year. Two things spooked Wall Street:
1. Amazon changed policies for 3P sellers, hurting SPSC's "Revenue Recovery" segment (acquired via Carbon6). Management expects up to 4,000 small suppliers to churn in 2026.
2. Q1 revenue of $192.1M missed estimates of $196.6M.
## Why I Think The Market Is Wrong
Management is intentionally pushing out low-value customers. They're introducing a $19.99/month minimum fee for these take-rate accounts. The customers leaving are the ones that cost more to service than they generate.
Meanwhile, the core Fulfillment business grew 8% and the non-Amazon parts of Revenue Recovery are growing faster than the overall company. They expect the Amazon headwinds to trough by mid-to-late 2026.
More importantly, if the moat was cracking you'd see margin compression. Instead, gross margins are 64.33% (above the 5-year average of 63.45%), and they just celebrated their 100th consecutive quarter of revenue growth.
## Valuation
| | |
|---|---|
| OE Per Share | $4.11 |
| Multiple | 15x |
| Business Value | $61.65 |
| Net Cash Per Share | $3.94 |
| **Intrinsic Value** | **$65.59** |
| Current Price | $51.17 |
| **Margin of Safety** | **~22%** |
I'm using 15x because this is a mature, high-recurring-revenue franchise with network effects, not a hyper-growth SaaS company. Management is deploying nearly 100% of free cash flow into buybacks ($47.1M in Q1 alone) rather than chasing acquisitions.
## What Would Make Me Sell
Technology disruption is the real long-term risk. If AI-native supply chain startups build a better mousetrap, the switching costs that protect SPSC today could become irrelevant tomorrow. They're rolling out their own AI suite (MAX), but it's early. I'm watching whether the 300,000 network connections remain sticky.
## Where I Come Out
I think this is a high-quality recurring revenue business getting punished for a temporary cleanup operation in one acquired segment. At 12x owner earnings, the market has priced in the disruption risk and is giving us the network effect moat for free. I hold a position.
*Disclosure: I hold a position in SPSC. Hard data from filings, AI-assisted writing, personal review and position. This is not financial advice.*