PTC's Long-Term IIoT Potential Is Attractive, But The Near-Term Macro Outlook Isn't

Considering that companies in the auto, electronics, and industrial categories make up about 60% of PTC’s (PTC) revenue base, I can understand why analysts and investors might be concerned about the near-term revenue growth outlook for the company, and particularly so considering the sizable shortfall in new subscription bookings for the first quarter. Management believes deal slippage, not macro issues, are the culprit, though, and it’s well worth noting that 2019 will be the year in which partnerships with Rockwell (ROK), Microsoft (MSFT), and ANSYS (ANSS) start to show some impact.

I wasn’t keen on PTC’s valuation back in July, and the nearly 20% drop since then doesn’t have me regretting that call, as these shares have lagged the market and rivals like Dassault (OTCPK:DASTY) and Autodesk (ADSK). I do like this business, though, and I’m still very bullish on the prospects for the company’s industrial IoT (or IIoT) platform to drive meaningful revenue growth and some synergistic sales with the legacy CAD/PLM/SLM offerings. Valuation remains a concern for me, though, and particularly with potentially building macro headwinds; it’s a toss-up call for me now, but definitely a name I’d revisit at a lower valuation.

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PTC's Long-Term IIoT Potential Is Attractive, But The Near-Term Macro Outlook Isn't

Materialise Addresses A Key Step In A Fast-Growing Manufacturing Opportunity

Automated manufacturing is taking on increasing significance across a range of industries, and 3D manufacturing is playing a growing role in that process. Companies like GE (NYSE:GE) have made significant investments into automated 3D manufacturing, and machine tool companies are increasingly integrating additive manufacturing capabilities into more traditional tool workstations. As more companies look to adopt 3D manufacturing for themselves, there will be more demand for software to operate those systems. That is where Materialise (NASDAQ:MTLS) comes in - while the majority of the company's revenue today comes from 3D manufacturing services, the company has a strong position in an important software segment that should drive meaningful growth.

Materialise is a small company operating in an industry that is still early in its development cycle. That's positive with respect to growth potential, but it makes modeling and valuation quite a bit more challenging.

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Materialise Addresses A Key Step In A Fast-Growing Manufacturing Opportunity

Dassault Systemes Priced Like The Leader It Is

Between strong share in its core CAD/CAE markets, good margins, healthy cash flow, and a collection of markets that the company may have only penetrated by about 10%, I understand why Dassault Systemes (OTCPK:DASTY) trades at hefty valuation multiples. What's more, when you consider the prices that companies like Siemens (OTCPK:SIEGY) and Hexagon (OTCPK:HXGBY) have paid for acquisitions in the space, I can understand why some investors are comfortable with the multiples, and particularly considering the possibility that revenue growth can be healthy for a number of years. While this is too expensive to be a core holding in my own portfolio, it's hard not to like a business that is at the heart of industrial software at a time when many companies like Honeywell (NYSE:HON) and General Electric (NYSE:GE) are talking up the importance of software and digitization in industrial markets over the next five to 10 years.

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Dassault Systemes Priced Like The Leader It Is

Investopedia: Autodesk A Little Undervalued, But Uncertainty Is Rising

It's interesting to see which excuses the Street willingly accepts when a company is struggling with guidance. In the case of Autodesk (Nasdaq:ADSK), the Street isn't too bothered by another round of lower guidance and ongoing economic uncertainties. Instead, investors seem excited about the potential of a more pronounced transition to a SaaS model. Although I think the Street may be a little too optimistic on that point, the shares do look a little undervalued and remain a volatile software play leveraged to improving economic activity.

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Investopedia: How Much Further Can Value Carry Autodesk?

I've been a little surprised by Autodesk's (Nasdaq:ADSK) performance over the past nine months or so. While I've long liked this company and thought it was significantly undervalued on a cash flow basis, I've been surprised that worries about macroeconomic conditions, the switch to a cloud/subscription model, and generally unimpressive top-line growth didn't overshadow that underlying value. With another disappointing quarter in hand and estimates heading lower, though, it may be a little harder for the value trade to support these shares in the short term.

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Investopedia: Autodesk's Growth Problems Go Front And Center

When I last wrote about Autodesk (Nasdaq:ADSK), I cited the company's lack of top-line growth (and the macroeconomic sensitivity of that growth) as key impediments to the stock living up to its apparent value. Based on this quarter and management's guidance, those growth concerns are biting even harder right now. Although management deserves praise for the extent to which it maintained margins, margin preservation and cash flow just aren't going to make much headway against the negative sentiment around revenue growth.

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Investopedia: For Autodesk, Growth Is Weighing On Value

Autodesk (Nasdaq:ADSK) is a great company, but tech stock investors don't care nearly as much about "great company" as they do "lots and lots of growth." Unfortunately, Autodesk is something of a victim of its own success in that regard, and the company is now seen as inextricably tied to overall global macroeconomic growth. While a discounted cash flow analysis suggests that Autodesk shares are significantly undervalued, value-oriented investors need to know that realizing that value is going to likely take quite some time.

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Investopedia: Autodesk Still At The Drawing Board

Going back to the drawing board is supposed to be a bad a thing - a mark of failure that comes after a plan does not quite work out as expected. For Autodesk (Nasdaq:ADSK), it's just another day on the job for this leading provider of design and digital content software, including the very well-known AutoCad software, which is a leader in drafting, design and architectural drawing. 

With the economic recovery in full swing, the question for Autodesk investors now is what the company can do to leverage its extensive brand value into new growth opportunities. The answer to that question may well spell the difference between an underappreciated growth opportunity and yet another well-known, old-school tech stock destined to languish. 

A Solid Start to the Year 

Autodesk got the year off to a good start. Revenue rose 11%, with license revenue rising 15% and making up more than 60% of total revenue. Looking at the company's segments, there was a pretty remarkable conformity. The platforms, manufacturing and design business all grew around 15% for the period. In contrast, weak infrastructure and commercial construction activity is keeping a lid on the AEC (architecture, engineering and construction) business, and growth here was just 3% for the quarter. 

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