How Much Are Digital Freight Brokerages Really Worth?

If everything goes right, the market cap of all digital brokerages could total $30 billion in 10 years.

The total addressable market for digital freight brokerage is a mere fraction of the size quoted in pitch decks and investment bank research reports, but there's still plenty of upside for a few winners – if things go their way.

Over the past few years, large digital freight brokerages (DFBs) backed by venture capital have emerged in the global transportation and logistics industry. Although in North America startups like Convoy, Uber Freight and Transfix dominate media coverage of DFBs, incumbents C.H. Robinson, J.B. Hunt and others have made large investments in technology to digitize their brokerage operations.

It's not just in North America – Berlin-based sennder raised a $70 million Series C in July that valued the digital brokerage at $300 million, post-money. BlackBuck, a DFB from Bengalaru, India, raised a $150 million Series D in March that valued the startup at $862 million, post-money. Finally, Beijing's Manbang Group, a DFB created in 2017 by merging two other Chinese firms, is seeking a $1 billion investment that would value the company at $10 billion. 

North American valuations have swelled, too: Convoy's last round valued it at just over $1 billion; and Uber Freight, a division of publicly traded Uber Technologies Inc UBER, is valued by the market at a multiple of its gross revenue, not its earnings before interest, tax, depreciation and amortization (EBITDA). 

Moreover, there's a disconnect between the way that private markets valued DFBs and the way that public markets value third-party logistics providers (3PLs) like Echo Global Logistics ECHO and C.H. Robinson CHRW. 

Freight Intel, FreightWaves' proprietary research desk, set out to answer questions about digital freight brokerage – given certain growth in the truckload industry and freight brokerages' penetration of the market, how big is the market available to DFBs? What kinds of gross margins and net revenue margins can DFBs expect to achieve? How will DFBs be valued once they are mature companies?

In "What Are Digital Freight Brokers Worth?", available on FreightWaves' SONAR platform later today, senior research analyst Seth Holm calculates a realistic total addressable market for DFBs and projects a market capitalization for the DFB segment of trucking transportation. Before coming to FreightWaves, Holm spent nine years at Concourse Capital Management, an Atlanta-based hedge fund, where he traded technology and consumer equities.

Most importantly and contrary to other available research on digital freight brokerage, the Freight Intel team shows its work, explaining the logic behind every assumption and attacking conventional estimates with top-down and bottom-up analyses. Readers of the paper will come away with, if nothing else, an intimate grasp of the structure of the freight brokerage industry and how its typical companies operate.

Holm begins his report by making short work of the oft-quoted $734 billion figure for the size of the trucking industry when used as a total addressable market by digital brokerages. Nearly half of that is accounted for by private fleets, parcel and courier businesses. For-hire truckload and less-than-truckload adds up to about $386 billion in size, and the current brokerage market according to Goldman Sachs, is $62 billion. Holm shows his work by also providing a bottom-up analysis of the size of the truckload market by adding together fleets of different sizes and calculating revenue per truck per year.

The most important (and telling) pieces of a valuation, of course, are the assumptions. A valuation tries to put a present-day number on future earnings – what is likely to happen to an industry and to a company, both in terms of external factors out of its control and internal factors within its control?

We assume that the truckload industry will grow along with nominal GDP and that freight brokerage has an approximate ceiling of 35 percent market penetration in 10 years, up from about 18 percent today. We also assume that DFBs will account for 50 percent of all freight brokerage in 10 years, up from about 1 percent today. Finally – to create a fair but realistic scenario where most factors work in DFBs' favor – the assumption is made that digital freight brokers are able to achieve an 8 percent gross margin in 10 years, up from about 1 percent today.

The report goes into the reasons for all of these assumptions and considers various counter-scenarios. Here's one example – FreightWaves estimates that today there are 67 freight brokerages generating $100 million or more in gross revenue and accounting for 82 percent of the freight brokerage industry's total revenues. For digital brokerages to take 50 percent of all freight brokerage, not only would all small (sub-$100 million) brokerages have to be eliminated, but an additional 32 percent of market share would have to be taken from the established players. 

"Traditional freight brokers are not sitting on their hands and rolling over," Holm wrote. "In fact, they are doing the opposite. Traditional freight brokers are investing billions in new digital freight matching platforms and apps."

DFBs taking 50 percent share, of course, implies a competitive battle of Armageddon-like proportions, which would result in deteriorating gross margins across the entire brokerage industry. While we think DFBs could gradually raise their margins to 8 percent from 1 percent, the Freight Intel group believes that traditional freight brokers could see margins compress from 15.7 percent to 13.2 percent. Due to market share declining faster than brokerage penetration grows, traditional freight brokerage net revenues would grow from $9.6 billion today and peak at $12.2 billion in year seven, then decline to $11.8 billion by year 10.

In the end, after including very aggressive assumptions on what digital freight brokerages will be able to accomplish, we project that the DFB segment could generate $7.1 billion in net revenue. Given similar net revenue margins to C.H. Robinson and similar P/E ratios, the market capitalization of the entire digital freight brokerage industry could end up around $30 billion, 10 years from now.

How will this dynamic affect publicly traded brokers?

"There are essentially three routes they can take: underinvest to maximize current earnings and profitability; heavily invest and cut (at least near-term) earnings power; or some combination of both (a "one foot in, one foot out" approach)," Holm wrote.

We believe the third strategy is the most likely one, because investors in publicly traded companies typically want companies to maintain stable earnings growth without ignoring long-term business risks. Companies that need to make large investments that eat up their earnings typically do so in private markets, where they have fewer and presumably more expert investors to answer to.

Holm did make note of one unlikely, but possible bear case for the digital freight brokerage industry.

"One possible but unlikely scenario that FreightWaves can envision is one where the DFBs take a copious amount of market share but significantly lower the freight brokerage industry's overall take-rate, margin structure and return on invested capital," Holm wrote. "In other words, a price war or race to the bottom in net revenue margins could ensue."

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