2023-05-12 17:38:36 ET
Summary
- ANSS is a leading provider of simulation technology in the market.
- ANSYS, Inc. has consistently achieved organic growth of 8%-10%, driven by market expansion and increased penetration of simulation software.
- The stock trades at a forward P/E of 46x, at a notable premium to its core comps group.
- I recommend a hold rating on the stock.
Thesis
ANSYS, Inc. ( ANSS ) is a leading provider of simulation technology, which is becoming increasingly crucial for product development. Although the company has significant exposure to high-growth areas like vehicle electrification and 5G, its overall growth is on par with industrial software competitors. Although I remain positive on ANSS's future outlook, I recommend a hold rating on the stock as I believe the stock is already trading at a premium multiple, and there are limited upside catalysts in the near term that may cause an upward multiple re-rating.
Company Overview
ANSYS, Inc. develops engineering simulation software that allows engineers to efficiently and affordably test their designs and models in virtual environments that replicate real-world scenarios. This reduces the reliance on expensive and time-consuming physical prototypes, enabling the faster and more cost-effective development of safer and more efficient products like automobiles, aircraft, computers, and wearable devices. The company's "Pervasive Engineering Simulation" strategy aims to expand the utilization of simulation across all stages of product development and within the ecosystems of partner companies.
Solid Q1 Results
ANSS had a strong Q1 with double-digit growth in various regions and key sectors, though Q2 guidance was lower than expected due to unusual seasonality. The first half of the year is largely in line with expectations, driven mainly by anticipated renewals. The company has increased its guidance for the year based on a stronger business pipeline and a solid renewal base expected in the second half of the year. ANSS has reaffirmed its guidance for free cash flow and profitability, with heavy 4Q seasonality expected for the former and an expansion in margins of over 500bps year-over-year for the latter. There is potential for growth from long-term trends such as AI/ML, HPC, numerics, and the cloud, which could help speed up complex simulations and support multiple iterative simulations needed for optimization. ANSS has invested in these technologies, positioning them well for future growth.
Simulation Becoming More Important for Product Development
As products become more advanced and complex, the need for effective testing becomes increasingly crucial and challenging. Several next-generation systems require simulation to ensure their reliability and performance. Examples of these systems include 5G and 6G communications, the industrial Internet of Things (IoT), autonomous vehicles, electrification, personalized healthcare, and next-generation energy.
Autonomous vehicles, for instance, are safety-critical systems that rely on multiple subsystems working together seamlessly. To ensure safety and regulatory compliance, these systems undergo independent and integrated testing, which may involve analyzing billions of miles of test-driving data. Simulation plays a crucial role in enabling the study of a vast number of scenarios, far more than physical tests alone can achieve.
Electric vehicles are another area where simulation is valuable. The development of electric vehicle components, particularly batteries, can be accelerated using simulation tools such as ANSS software. This software aids in the integration of electrified powertrain systems, battery management, and electric motor simulation. ANSS claims that its software can reduce the development time of electric vehicles by over 50%.
In the realm of 5G and 6G communications, simulation has proven beneficial in accelerating development and reducing costs. ANSS reports that customers who utilize simulation tools have experienced up to a three-fold acceleration in the development time of these communication technologies, along with a cost reduction of up to 60%. ANSS offers various products for antenna design and placement, battery simulation, electromagnetic simulation, and more, which contribute to the advancement of 5G and 6G technologies.
In summary, simulation plays a critical role in testing and validating complex systems such as autonomous vehicles, electric vehicles, and advanced communication technologies. It enables engineers to explore a wide range of scenarios, significantly accelerating development time and reducing costs in these cutting-edge fields.
Sizing the Market Opportunity
ANSYS has outlined a total addressable market ((TAM)) of $15.8 billion, expected to grow to $20.6 billion by 2026. The TAM consists of three main segments: Foundation TAM, High Growth TAM, and New Adjacencies TAM.
ANSS's organic growth rate of around 9% in recent years has only slightly exceeded the projected growth in the Foundation market. The high-growth opportunities, including electric vehicles and 5G design, have seen robust demand. However, autonomous vehicles have underperformed early expectations due to societal debates and uncertainties surrounding decision-making in certain circumstances. The industrial IoT market has also developed slower than anticipated due to factors beyond ANSS's control, including unclear value propositions, challenges in implementation during the pandemic, and customer hesitation in choosing the right platform.
Regarding new adjacencies, digital exploration/ideation has gained popularity, primarily driven by ANSS's Discovery product that integrates with CAD programs. However, progress in additive manufacturing has been slower, and mainstream adoption of digital twins is still some distance away.
Financial Overview and Valuation
I view ANSS as a mature company with a strong financial profile. The company achieves solid growth through a combination of effective execution and strategic mergers and acquisitions. ANSS maintains high operating margins, primarily due to its strong market position. It has consistently delivered 8%-10% organic annual contract value growth, and I expect this to continue. In my view, the growth will be driven by both the expansion of the product design software market and the increased adoption of simulation software within that market.
While I remain bullish on ANSS's core simulation opportunity, competitive positioning, and the ongoing shift to subscription licensing over the long term, I do not expect to see a meaningful and sustainable reacceleration of growth seen in the previous years. ANSS trades at a forward PE of 46x, at a significant premium to the core comps group. While I view the current multiple as appropriate, I find limited upside from these levels due to limited potential catalysts; therefore, I recommend a hold rating on the stock.
Conclusion
ANSS is a leading provider of simulation technology, with the total addressable market expected to reach $20.6 billion by 2026. ANSS has achieved consistent organic growth of 8%-10% in recent years, driven by market expansion and increased penetration of simulation software. ANSS maintains a strong financial profile with high operating margins and solid growth. However, the current valuation offers little room for upside reiteration.
For further details see:
ANSYS: Premium Multiple Leaves Little Room For Upside In Stock