2023-06-16 11:10:49 ET
Summary
- ANSS continues to demonstrate strong growth and profit performance in uncertain environments.
- ANSS startup and university partnership strategy enables it to future-proof its long-term growth trajectory.
- Despite the company's positive outlook, the current elevated valuation of the stock warrants a hold rating until it becomes more reasonably priced for investment.
Investment thesis
Just as expected, ANSYS (ANSS) demonstrated again its ability to grow even in an uncertain environment. ANSS's growth exceeded expectations by double digits in several key regions and industries, and management increased their ACV guidance for FY23. After a slower first quarter, I anticipate the guidance will come to fruition in 2H23 due to the growing business pipeline and the strong renewal base. What stood out to me was ANSS's profit performance, with margins increasing by >500bps year over year. In short, I think the business has done really well and I see no visible catalyst that will cause stop the current momentum. My long-term expectations for the company have not changed either. Therefore, ANSS remains one of my favorite defensive growth stories in the market, and I have covered the strong value proposition it offers to engineers who aren't involved in the product life cycle's validation and analysis. However, I continue to maintain my hold rating on the stock because I believe the current valuation is still excessive ( I wrote about this previously ).
Strategy to improve pipeline
It is not by chance that ANSS has been able to grow defensively in this weak macro environment; rather, it is due to the company's strategic participation in winning customers at the outset of the project timeline. As such, ANSS has a strong pipeline breadth. Two of the strategies that are worth highlighting, which I believe sets ANSS apart are its startup program (Currently, there are more than 1,500 startups from 52 countries that are in this program) and partnership with universities . I believe this strategy enables ANSS to future-proof its growth trajectory as it penetrates the potential pool of customers right from the get-go. In the context of startups, providing discounted solutions and tools enables ANSS to win their trust and spread their brand/product to the startup community (which is typically closely knitted via VCs and networking events). As these startups scale to become large companies, ANSS would be with them at every stage, thereby providing ANSS continuously upselling and renewal opportunities. In the context of partnering with universities, as students enter the workforce, they already have familiarity with the product and would most likely select it as a vendor of choice. With more and more ANSS users in the industry, this leads to potentially more voice in the market to support ANSS as the vendor of choice.
Ecosystem
Keeping on the topic of collaboration, I appreciate the way management has prioritized maintaining an open ecosystem, working with other software providers to provide the best solution for customers. This tells us that management understands the new market environment today, where there is a group of customers that don't use system integrators. This group of customers prefer to choose what they like. ANSS, for instance, recently expanded their collaboration with Synopsys to include the use of ANSYS technology in their own offerings. By keeping an open ecosystem also enables ANSS to be "everywhere", such that it has the potential to be part of the system that the customers use whoever they decided to work with. At the JPMorgan Global TMC Conference, management revealed that many of their clients use both Cadence and Synopsys, indicating that customers are unlikely to settle on a single vendor solution.
EV trend supportive of growth
The growing interest in electric vehicles and autonomous driving is just two of the major developments in the automotive industry that are driving the need for simulation. The shift from internal combustion engines to electric vehicles ushers in a simpler, more modular product architecture. However, with this transition comes fresh difficulties for automakers to solve, such as reducing road noise in electric vehicles. Electric vehicles require extensive re-engineering because, unlike ICE engines, noise is immediately audible in them. Electric vehicles are becoming increasingly complex as more software and electronics are integrated into their design. Hybrid vehicles, which combine ICE and EV propulsion, present the greatest design challenges, but are now offered by most automakers. As a result, the combined effect of these various products and services increases the need for simulation throughout business.
Conclusion
ANSS has once again demonstrated its ability to thrive in an uncertain environment, exceeding growth expectations in key regions and industries. The company's profit performance, with margins expanding significantly, further highlights its strength. ANSS's strategic approach, including initiatives like the startup program and university partnerships, positions it for future growth and continuous upselling opportunities. Maintaining an open ecosystem and collaborating with other software providers enhances ANSS's presence and flexibility in meeting customer needs. The growing trend of electric vehicles and autonomous driving further supports ANSS's growth prospects, as simulation becomes crucial in addressing the complexities of these advancements. The only issue now is the elevated valuation that needs to come down before it is worth investing in the stock.
For further details see:
ANSYS: High Valuation Nets Off The Positive