This Potential Software Company Shares may Represent an Outstanding Decade-Long Investment Opportunity
Everyone's aware of the expanding influence of artificial intelligence (AI) and wireless-enabled digital technologies in our daily lives, but not everybody understands their profound impact on the manufacturing sector and the part an industrial software company like PTC (PTC -0.46%) is playing in it.
The widespread use of these technologies is set to boost PTC's value-addition to its manufacturing clients and pave the way for the company's considerable growth for several years.
Welcome to the Fourth Industrial Revolution
The First Industrial Revolution marked the advent of steam power and the inception of mechanical manufacturing. The Second brought electricity and mass production. The Third was powered by the information age (semiconductors, computing, and the internet).
The Fourth Industrial Revolution signifies the dawn of smart, integrated digital technologies that collaborate in real time. These technologies significantly benefit the manufacturing sector, and PTC's software plays a crucial role in them.
The Closed-Loop Digital Thread
The crux of PTC's software lies in the so-called closed-loop digital thread. This involves the collection of digital data throughout a product's lifecycle, its analysis, and its subsequent improvement of the process. This process extends from the initial design phase to manufacturing, servicing, and disposal.
For instance, a product's design is created using PTC's computer-aided design (CAD) software. Then, PTC's product life-cycle management (PLM) software aids in formulating a manufacturing process by monitoring and controlling production.
Simultaneously, PTC's Internet of Things (IoT) software links the process to the digital realm, and its augmented reality (AR) solutions digitally augment manufacturing. Ultimately, PTC's software life cycle management (SLM) manages the product's servicing.
These disparate software solutions work together to enhance the whole closed loop iteratively. For example, a PLM analysis might suggest the need to revise the design (CAD) to improve manufacturing efficiency or quality, or a design change might necessitate alterations in the servicing or manufacturing of the product, which can be digitally predicted.
As CEO Neil Barua stated in a recent earnings call, PTC's customers need: "to shorten our development timelines as quickly as possible with the highest quality to remain competitive. This includes our hardware, mechanical, electronic, and embedded software processes that all need to come together for a final product."
A Revolutionary Technology
According to market researcher and consultant IDC, spending on digital transformation is expected to experience a 16.2% compound annual growth rate from 2022 to 2027, reaching $3.9 trillion, as opposed to $1.9 trillion in 2022. Although this projection is dependent on overall economic growth, it reflects the inherent demand for digital technology and industrial software.
Despite the negative impact of the last couple of years on PTC's growth due to manufacturers curtailing investment plans due to a struggling economy, the company has maintained double-digit growth in its annual run rate (ARR), or the annualized value of its subscription software, software as a service (SaaS), and support contracts at the end of a period.
ARR is a key metric to track for PTC, and as seen below, it's pivotal for its growth of free cash flow.
PTC's Growth Aspirations
Furthermore, management is overhauling the business to fuel ARR growth by refocusing on its five primary industry verticals: industrial products, aerospace and defense, electronics and technology, automaking, and medical technology and life sciences.
To this end, the company recently appointed Microsoft's former vice president for global healthcare and life sciences, Robert Dahdah, as its chief revenue officer. According to the press release announcing the appointment, Dahdah will oversee sales and customer success for PTC's Digital Thread group and its new focused market strategy.
PTC's Growth Prospects
The Fourth Industrial Revolution heralds an era of digital technology investment, and PTC's software suite spans the closed-loop digital thread. As a result, it's not unlikely that the company can grow at a rate of at least as much as the mid-teens that experts foresee over the next decade.
And PTC's focus on core end markets and the potential for a resurgence in industrial spending amid lower interest rates bode well for its substantial growth in the intermediate and long terms.
The integration of PTC's software solutions, such as CAD, PLM, IoT, and AR, in the manufacturing process is expected to significantly boost finance gains for companies by improving efficiency and quality, potentially leading to increased revenue and profit margins.
Recognizing the significance of digital transformation in the industrial sector, market researchers anticipate a 16.2% compound annual growth rate in spending on digital transformation from 2022 to 2027, creating a vast opportunity for companies like PTC that specialize in industrial software.
