The future of the manufacturing industry lies in adopting digital technology, which means industrial software, specifically software that connects the digital and physical worlds. That's PTC's (NASDAQ: PTC) raison d'etre, and the company looks set for solid growth for many years. Moreover, despite a 57% appreciation, the stock's valuation remains highly attractive for growth investors.
PTC isn't firing on all cylinders yet
The increasing adoption of digital technology is a powerful secular growth driver, but it doesn't fully offset the cyclical weakness in some of PTC's end markets. Management defines its five key end markets as industrial products, federal aerospace and defense, electronics and high technology, automotive, medical technology, and life sciences.
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It's no secret that the industrial, automotive, and electronics/technology sectors have been under pressure this year. CEO Neil Barua has previously discussed a sluggish sales environment impacting PTC's ability to convert sales leads into larger deals.
But PTC continues to grow its key metric, annual run rate (ARR), by a low-double-digit rate. Management defines its ARR as "annualized value of our portfolio of active subscription software, SaaS, hosting, and support contracts as of the end of the reporting period."
As such, its ARR aligns with what PTC invoices customers annually, and management believes it is the best way to judge the progress of its subscription business. If anything, it's possibly a conservative measure for a couple of reasons:
Given that PTC offers a range of software solutions that operate in a so-called digital thread closed loop, it's likely that many of its customers will buy more of its software solutions after utilizing its core product lifecycle management (PLM) solution. As such, contract values will likely increase if customers increase orders. Similarly, with the adoption of digital technology likely to increase, PTC is expected to have a high retention rate, implying multiyear contract invoicing.
What is the digital thread closed loop?
The digital thread closed loop concept is simply the continual and iterative data flow between the physical and digital worlds. For example, PTC's computer-aided design (CAD) software helps digitally design a product. In contrast, PLM helps manage the product, automating and monitoring its production. And service lifecycle management (SLM) software helps support and service a product (say, an elevator).