This is not an argument about whether PTC (NASDAQ: PTC) or Trimble (NASDAQ: TRMB) is a better company; both are great and have excellent long-term prospects. Instead, I think one stock has a significantly better risk/reward profile and is worth buying now, while the other is fully valued and has some near-term risk around its full-year guidance.
PTC has an exciting future
Industrial software company solutions are the future of manufacturing. The digital revolution sweeping the manufacturing and industrial sectors is still in its early stages, which means PTC will have many more years of growth to come.
Image source: Getty Images.
If there are two phrases that every manufacturer will be watching in the coming years, they are “digital thread” and “closed loop cycle”.
The first refers to the integration of digital data throughout the entire life cycle of a physical product. Whether it’s the design phase using computer-aided design (CAD) software, collecting product data throughout the manufacturing process using product lifecycle management (PLM), or even improving operations by connecting products to the digital world with the Internet of Things (IoT) or extended reality (AR), PTC has a solution.
Meanwhile, the “closed-loop cycle” refers to continuous digital iteration and improvement throughout the product’s life cycle. So, for example, if data analytics suggest that a product can be better produced by redesigning the manufacturing process, a design engineer can do so and even digitally test the manufacturing process changes created by the redesign.
PTC’s risk/reward calculation
The company has an exciting future, and its solutions continue to gain traction. PTC has grown its annualized rate of return (ARR), defined as “the annual value of our portfolio of active subscription software, cloud, SaaS and support contracts,” by a double-digit annual rate since 2017, and management is targeting an annual mid-term growth rate .
So why on earth would you not prefer to buy stocks?
I am concerned that the company has a lot to do to meet its ARR guidance for the full year. Management guidance calls for ARR to grow from $1.98 billion at the end of 2023 to $2.22 billion at the end of 2024, an increase of $241 million.
ARR was up $38 million in the first quarter, and management is targeting $41 million in the second quarter, making it $79 million for the first half. Since full-year guidance calls for an increase of $241 million, this implies an increase of $162 million in the second half.
Here’s how it looks graphically.
Chart by author. Data source: PTC presentations.
With growth in the first half estimated to be lower than that achieved in 2023, and the industrial economy slowing in 2024, the estimate of growth in the second half looks questionable.
PTC could hit this target, but I think there is reason to be cautious. Investors should take a close look at what ARR PTC reports in the upcoming second quarter.
Trimble’s underlying growth is impressive
A quick look at the price charts of the two companies shows that Trimble has had a much more volatile time over the past year. That’s understandable, given that Trimble’s annual earnings were at the tail end of his original guidance. For example, initial guidance for 2023 called for organic annualized revenue growth in the “mid-teens,” when it was 13%. Guidance for organic revenue growth was 2% to 5% when it came in at 1%, and diluted earnings per share were $2.66, at the bottom of guidance of $2.66 to $2.86.
TRMB data YCharts
The positioning and workflow technology company is growing its software revenue and recurring revenue as it becomes a bigger part of its customers’ daily workflows, and continues to grow its annual recurring revenue at a mid-teens rate. However, two of its end markets, agriculture (its agricultural business is now part of a joint venture with AGCO) and transport, slowed significantly in 2023 due to lower crop prices and the cyclical slowdown of the economy.
In this regard, guidance for organic annualized revenue growth in 2024 is 11% to 13%. Trimble is poised to significantly improve its cash flow generation in the coming years as its recurring revenue falls into cash flow. Additionally, guidance looks reasonable given the 13% organic growth in annual recurring revenue in the fourth quarter.
Stocks to buy?
PTC and Trimble plan to grow earnings and cash flow significantly in 2024, but I think there is more risk around PTC’s guidance than now. Cautious investors will want to wait and see what management directs them to after the next round of earnings. Meanwhile, Trimble’s earnings could surprise to the upside in 2024 if it has excellent traction in construction and its trucking market could bottom out.
Should you invest $1000 in PTC right now?
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Lee Samaha has no position in any of the mentioned stocks. The Motley Fool recommends PTC and Trimble. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc.