AKAAF - Dassault Systemes: Growth Inflecting Upwards

2023-09-05 05:45:17 ET

Summary

• Dassault Systemes is experiencing a slowdown in the current quarter but expects an uptick of growth in the next quarters.
• The company's valuation is a concern, as it trades at a high PE ratio and is dominated by superior value picks in somewhat of the same space.
• While it will see inflection upwards of growth, and the performance will be fine, 2023 is a bit of a lost year due to inflation, which has meant profit declines.
• Probably not good value at the current price.

Dassault Systemes (DASTY)(DASTF) is a pretty high-tech enterprise player. They are in some interesting spaces , including virtual twin modeling and also in simulation and other tech for therapeutics. Things have slowed a bit this quarter, but everything concretely points to an incoming uptick in the next quarters. The issue is valuation, especially where you can get other exposures in somewhat similar domains for a lot cheaper.

Q2 Breakdown

Growth hasn't been that good, primarily on the life sciences side. The company trades for a PE well above 40x, so that is disappointing.

However, there are reasons for this. In life science, COVID related programmes are done, and in general expenditure in the biotech space and activity from CROs has been lessened by about 10%, which is impacting the life sciences businesses. Going forward, the growth is highly likely to accelerate. Bookings are up around 17% in that division , and the benefits will start to show in the coming quarters. These are coming from multi-year renewals that are expanding the scope of their services within the businesses of high profile pharma clients, consistent with headlines from major equity research houses. The value here is pretty undeniable overall, thanks in particular to the fact that costs from delays in clinical trials are extremely high for pharma companies. Any efficiency gain here can see major value capture by Dassault Systemes, and they are achieving massive reductions in clinical trial cycle times with clients, around 50%.

Otherwise, business performance has actually been more or less in line with expectations. China is performing well despite the economic situation thanks to weak comps and is even accelerating sequentially, and the expansion in North America, which has been a primarily pillar in the company's next phase of revenue growth, is going well.

Their other segments are growing at a healthy clip, and the deal roadmap seems to be pointing in a positive direction. The nature of the businesses are substantially recurring as they work on a subscription basis.

On the efficiency side, the performance is middling. Expenses were up 11%, where 7% headcount additions were conducted, meaning inflation has taken its toll. This has outpaced sales, and operating income performance was of declines at around 17%. While a re-acceleration of sales will likely not come with much incremental cost, as booking have already closed in the lagging life sciences business, things aren't going all that well.

Bottom Line

The problem is valuation. It's a bit unconscionable. While there are AI elements to the Dassault Systemes story thanks to their simulation and modeling capabilities, the PE is massive. The PE is close to 50x, despite the fact that the business is not doing a good job of outrunning cost increases and is not performing that well in terms of sales growth. Other enterprise software companies are performing just as well. While some premium might be deserved considering capabilities and end-markets, which are value and resilient, it's not enough considering alternatives on the market. In particular, we would never select Dassault Systemes over Aker (AKAAF), which offers its Cognite business, also big on virtual twins but more focused on heavy industry, for free despite its heavy AI leanings. Not sure who the incremental buyer is of this stock - not us.

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