Industrial software stock PTC(NASDAQ: PTC) is the sort of company investors should consider buying into on a dip. The company's recent third-quarter results, for the period ended June 30, and commentary on its fiscal 2025 were impressive in the current environment, and this company's long-term growth is only starting. Here's why PTC is a great stock for long-term holders.
Attractive end markets
PTC's software solutions help customers digitally transform their operations. From initial conception using computer-aided design (CAD) through to product lifecycle management (PLM) utilizing Internet-of-Things (IoT) solutions such as digital twins or augmented reality (AR) to enhance productivity, PTC's solutions are there to improve outcomes.
PTC's solutions operate as part of a so-called "digital loop," which continuously flows data into the loop so that a company can iteratively improve its operations. A real-world example could come from a company discovering that it can significantly reduce production costs (using PTC's PLM software) if a product is redesigned (using CAD) in a certain way.
The benefits of such solutions will only grow as analytics improve and customers move toward digital adoption. These are exceptional underlying and secular growth drivers, and PTC is well placed to benefit from them.
Growth from cross-selling solutions
As intimated above, PTC's range of solutions operating within a closed loop means that there's an opportunity to upsell to customers who own one disparate part of PTC's range of solutions.
This is particularly relevant given that the current PTC CEO, Neil Barua, was formerly the CEO of ServiceMax, PTC's service lifecycle management (SLM) business acquired in early 2023. Speaking on a previous earnings call, Barua noted, "We've been focused on cross-selling ServiceMax into our strong base of customers where we have established customer trust." This is just one example of one solution that PTC can use to generate growth from its existing customer base.
Image source: Getty Images.
ARR growth
The key metric that PTC uses to gauge its growth is its annual run rate (ARR). It represents the "annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period," according to the company. As such, it's a better measure to judge the company as the ARR will drop down into free cash flow (FCF) on a regular basis.
Management argues that "Over the mid-term, we expect free cash flow to grow faster than ARR," and that's exactly what's borne out when looking at PTC's metrics in recent years.
Key Metrics | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 Est. |
|---|---|---|---|---|---|---|
ARR | $1,043 million | $1,156 million | $1,353 million | $1,572 million | $1,941 million | $2,200 million-$2,220 million |
ARR organic growth | 12% | 11% | 17% | 16% | 13% | 11%-12% |
FCF | $221 million | $214 million | $344 million | $416 million | $587 million | $725 million |
FCF growth | 4.2% | (3.2%) | 60.7% | 20.9% | 41.1% | 23.5% |
Data source: PTC presentations.
While management hasn't given formal 2025 guidance yet, on the recent third-quarter 2024 earnings call, CFO Kristian Talvitie intimated that PTC might guide toward low-double-digit growth for ARR and FCF of $825 million to $875 million.
For reference, the midpoint of that FCF range is $850 million, which, if realized, would put PTC on less than 24 times FCF in 2025 based on the current valuation.
That's an excellent valuation, provided ARR keeps growing at a double-digit rate and FCF at an even higher rate.
PTC can play defense, too
Another attractive aspect of PTC is its capability to adjust to a slowdown in its end markets. While the company continues to generate excellent growth, it's operating in end markets that continue to contain challenges. For example, management has consistently referred to the difficulties in closing rates on large deals.
Image source: Getty Images.
According to Barua, "We have a disciplined process to manage our internal spending based on the level of ARR growth we are seeing." As such if ARR growth slows PTC has the flexibility to cut spending and in doing so boost FCF generation to offset any loss of upfront revenue from new deals.
A stock to buy
All told, PTC remains one of the most attractive stocks to play the digital revolution, and any significant weakness in the share price is a good opportunity to buy based on the current valuation and prospects.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends PTC. The Motley Fool has a disclosure policy.
