Demandware Inc. (NYSE:DWRE) offers a platform to establish and execute digital commerce strategies. The company had recently announced that it has struck a deal with beauty products company L’Oreal. Demandware’s share price witnessed an increase of 8.2% yesterday, nearing the top range of its 52-week trading range, on account of L’Oreal deal. L’Oreal will use Demandware’s commerce platform to promote 25 famous brands around the globe.
Demandware’s Jun 2013 revenue grew at a Compound Annual Growth Rate (CAGR) of 42.6%. Although the company’s revenues have been increasing, the overall losses (before non-recurring items) have also been increasing for the past two years. Since Demandware is in its nascent stage, a majority of its total operating expenses is being spent towards sales and marketing, which is roughly 50% of the total operating expenses. We anticipate the company to spend more on SG&A (as a % of revenues) in an effort to expand and improve the business but profitability cannot be guaranteed.
In 2012, the company’s top 10 clients contributed to 36% of total revenues and had one client contributing more than 10%. Demandware typically makes most revenues during December quarter due to inherent business nature of its clients.
The number of clients have been going up as shown in the chart below -
With respect to the valuation multiples, we feel that Demandware is overpriced as compared to other peers (based on Price/Sales multiple) as shown in the table below. We would not favor Demandware in the near future.
|Company||E/V Revenue||P/S ratio|
|Open text CP||3.0||2.9|
|Digital River Inc.||0.7||1.5|
From an investor standpoint, the company’s earnings is a key concern. The stock price has already seen enough upside from the day of its listing. It is now company’s turn to prove that the share price is worth what it is currently.