Software provider WiseTech is bracing for more share price volatility as investor scepticism grows ahead of its much awaited response to criticism from short sellers.

WiseTech Global’s interim financial result will be announced on 19 February and is expected to tackle damning reports from two short sellers, J Capital and Bucephalus Research, who claim the company is inflating its growth numbers.

Since the publication of the first J Capital report, shares in WiseTech (ASX: WTC), a cloud-based logistics platform, have fallen by 37 per cent fall from a record high of $38.80 in September last year.

Narrow-moat WiseTech is overvalued to the tune of 195 per cent, according to Morningstar analyst Gareth James, who says the interim result is “potentially explosive”.

“The interim financial result should provide much-needed clarity, although evidence either supporting or rebuffing the allegations is likely to cause significant share price volatility,” James says.

“Either way, at the current market price, we still think the stock is significantly overvalued relative to our $8.10 fair value estimate.”

James concedes J Capital and Bucephalus have their own agendas and says their claims should be met with caution.

Their goal, he says, may be to “drive WiseTech’s share price down and help their clients profit from short-selling.”

The short sellers have three chief criticisms of WiseTech:

  • That it is using a rapid rate of acquisitions to give the impression of strong organic revenue growth
  • That the capitalisation of software development costs is artificially boosting profits
  • That the financial statements and management presentations are misleading

When the result comes down next month, James urges investors to scrutinise the following:

  • the organic revenue growth rate rather than the growth in total revenue, which will be boosted by acquisitions
  • the extent to which research and development costs have been capitalised
  • Free cash flow generation, by which he means operating, less investing cash flow

An earnings downgrade will be punished by the market as will management’s credibility given its staunch defence of its actions, James says.

“We’ve long held the view that WiseTech has poor disclosure regarding its key revenue and cost drivers, and the difference between reported profit and profit including capitalised research and development costs is also a concern.”

Despite the criticisms, WiseTech has held firm on its fiscal 2020 earnings guidance, including revenue of $440 million to $460 million, implying a 30 per cent increase on the prior year, and pre-tax profits of $145 million to $153 million, or 38 per cent on the prior year.

“Both are consistent with our $446 million revenue forecast and $146 million earnings before interest tax, depreciation and amortisation forecast,” James says.

“However, it’s possible that the company will upgrade guidance, as it has done historically, and following the acquisitions announced since the last guidance update.”