Summary
- Though its share price is down, ANSYS has maintained steady revenue.
- The company maintains a strong position in the fast-growing tech sector.
- Strong financials and growth potential make ANSYS a company that investors should include in their portfolio.
- I have a price target of $265 for ANSS stock, which means the stock is undervalued currently.
Key Highlights
In the third quarter of 2022 , ANSYS ( ANSS ) reported GAAP revenue of $472.5 million and non-GAAP revenue of $473.7 million. The company's GAAP diluted earnings per share were $1.10, and its non-GAAP diluted earnings per share were $1.77. ANSYS also had impressive operating profit margins, with a GAAP operating profit margin of 26.1% and a non-GAAP operating profit margin of 41.0%. The company's operating cash flows were $127.2 million, and its unlevered operating cash flows were $132.0 million. ANSYS' annual contract value was $409.3 million, and its deferred revenue and backlog were $1,108.9 million on September 30, 2022. These strong financial results could be a good reason for investors to consider buying ANSYS stock.
About ANSYS
ANSYS is the industry leader in simulation, a fast-expanding business and service used in a variety of applications and sectors. Among many other industries and applications, this includes aerospace, general industrial applications, phones, vehicles, food, and healthcare. Autonomy, electrification, 5G, and cloud are among the integrated set of services employed in simulation. Engineers and designers can develop and test models for upcoming advancements using the ANSYS software before anything needs to be constructed in the real world. The collaboration of all these services makes it difficult for rivals to imitate the solutions that ANSYS provides to its clients.
ANSYS has proven themselves to be a steady growth company. After all, businesses need to repeatedly purchase ANSYS' new software to continue innovation and build concepts that can help expand their own business.
ANSYS' revenue has continued growing and was not impacted by the recession.
Financials
Over the past few years, ANSYS has kept a clean balance sheet, with relatively low debt compared to its earnings. One potential area of concern is that their operating expense is increasing at a higher rate than their revenue, albeit through the use of stock-based compensation. However, as a software company, their business model is highly profitable since they can repeatedly sell the same copy for millions.
ANSYS has demonstrated its ambition for global expansion through its diverse customer base and partnerships across various industries. In the second quarter of 2022, the Americas accounted for only 41.3% of ANSYS' sales, with Asia-Pacific and EMEA making up the remaining 58.7%. This global presence could help ANSYS tap into new markets and increase its revenue.
Moreover, ANYSYS' partnerships with companies across multiple industries could provide a stable source of income during economic downturns. For example, 31% of the company's annual contract value ((ACV)) is related to high-tech industries, 21% is related to aerospace and defense, and 17% is related to automotive. This diverse customer base could help ANSYS weather any potential downturns in a specific industry.
Additionally, ANSYS' partnerships with companies across various industries could protect it from being significantly impacted by the actions of any one particular company. For example, if a large company were to use its power to try and reduce ANSYS' prices, ANSYS could still rely on its other customers and partnerships to maintain its revenue.
Also, it should be mentioned over 97% of the outstanding shares are controlled by institutional investors, which tampers the company’s volatility.
Growth potential
Personally, I believe ANSYS has strong growth potential in the current climate of constant technological innovation. ANSYS has a majority of its income from recurring customers but seeks to expand into many more fields. As the market leader of its industry, it is unlikely its growth can be hindered by small competitors. It would be even more difficult for its customers to switch to alternatives, as that means completely changing the interface. I believe the need for ANSYS will only grow. After all, the company provides software to simulate designs that would otherwise be much more costly to calculate.
Traditionally, ANSYS has maintained a steady revenue increase YoY of over 10%, with last year being around 13%. I believe the revenue will continue growing, under the assumption the recession doesn’t go out of hand.
High tech, the biggest part of ANSYS' ACV, is quite broad and includes companies like Apple (AAPL) and NVIDIA Corporation (NVDA). Domestically, tech industry profits will grow about 2% this year, rebounding to 6% growth in 2023 . Globally, with the modernization of many third world countries, we can expect growth like the one depicted in the chart below. New businesses in many developing countries shall look forward to cooperating with ANSYS to help build their components.
Aerospace and defense , another significant part of ANSYS' ACV, is still recovering from quarantine. In 2021, their operating profit more than doubled and their revenue already started coming back. This was just domestic, but we can expect much of the same elsewhere too. Some notable number is that the operating profit went up 136% this year. During the 2021 year, industry revenue was still around 9% lower than that of 2019, but recovery is in sight. Even countries like China have started lifting some of their international travel policies. As for defense, even if government funding goes down, ANSYS software will still be repetitively purchased as long as they remain the monopoly.
An area of concern is that this sector is dominated by a few monopolies, decreasing the number of potential customers. Nonetheless, it should remain a top part of ANSYS' ACV.
Automotives, likewise, can expect continued growth and a need for ANSYS software. As you can see below, the industry expects roughly a stable, 8% growth for the next few years. On top of it, the automotive industry has been increasingly competitive and many are turning to EVs. The demand for “smart” cars is growing at an unprecedented rate. ANSYS specializes in dealing with high-tech such as reliable Printed Circuit Boards, and the automotive industry will take full advantage of it. I expect their ACV share in this department will continue to impress, possibly growing around 12% YoY.
With a bigger market comes more competitors, and ANSYS helps give a company an edge by giving a more cost-effective solution to simulate concepts and create innovation. I am positive the demand for their software is only going to increase globally, resulting in more revenue.
ANSYS - Valuation and Price Target
According to analysts at CNN Business , ANSYS should be valued at $262.50, with an overall positive outlook for the forecast.
Doing my own DCF calculation, I assumed the earnings would grow at around 11% for the next 10 years, which I think considering the market and their past performance is a fair evaluation. Over the past 12 years, they’ve been growing at an average of 12.11%.
I used a standard intrinsic value equation when finding my own price target. I kept their current discount rate, and I set the sell-off value as 12x the estimated cash flow of year 10. It is common that a large company would be valued 12x above its cash flow, compared to ~5x I would use for a small company. I then added it to their cash & cash equivalents and terminal discounted flow. This gives me a rough estimate of their intrinsic value. When divided by their outstanding shares, I got an intrinsic value of $265, 8% above their current value.
To me, it’s a perfect time to invest in ANSYS. I feel like I was conservative in calculating their growth rate, considering we're moving toward an era of software.
Risks
Perhaps the biggest upside to ANSYS is that they’re relatively risk-free. Their large portion of income outside US may be hindered from a recession, but their revenue proved otherwise. With a large customer base and over 70% of its revenue from recurring clients, it is difficult to imagine how the software monopoly may fall.
Their most notable competitor is Cadence ( CDNS ), which also specializes in simulation. They have a promising new team Allegro , which attempts to revolutionize chipsets building. I shall cover it in detail for another article, but basically, it helps reduce time spent on routing, optimization, and simulation for the circuit boards. However, what I think is most likely in the case Cadence outperforms ANSYS is that companies will still purchase both software packages for their unique strengths, just like Apple and Google (GOOGL) (GOOG) are currently doing. In my view, the cave is big enough for two wolves.
ESG
It should be mentioned that around 75% of ANSYS' sales are direct, with the sales force directly contacting the consumers. This help provides a better reputation for the salesmen and makes it much easier to maintain high-recurring revenues, as they’re trusted to help the customers. ANSYS is also ranked 13th among 100 US companies recognized for employee sentiment and satisfaction.
Conclusion
ANSYS is a leading provider of engineering simulation software with strong growth potential. The company has a diversified customer base and is expanding its global presence, which could help it tap into new markets and increase its revenue. Additionally, ANSYS has a strong track record of innovation and is constantly developing new products and services to meet the changing needs of its customers.
From an investment perspective, ANSYS' strong financial results, global expansion, and focus on innovation suggest that it could be a good investment opportunity. My intrinsic value of $265, which is 8% higher than the current market value, also indicates that the company may be undervalued. Therefore, investors who are looking for growth opportunities and are willing to take on some risk may want to consider buying ANSYS stock. However, it is always important for investors to conduct their own research and carefully evaluate the risks and potential rewards before making any investment decisions.
For further details see:
ANSYS: A Great Investment Opportunity