What happened
Shares in industrial software company Aspen Technology (AZPN) slumped 10.5% in February according to data provided by S&P Global Market Intelligence. While the S&P 500 also fell during this timeframe, Aspen's results follow a slightly disappointing set of second-quarter earnings released at the end of January. In fact, at the time of writing the stock is down 11.4% on a year-to-date basis compared with a 5.9% decline for the S&P 500.
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To understand why, you have to examine what the company does. Aspen is an industrial software company operating in the manufacturing execution systems (MES) space. Key end markets for Aspen include heavy industries like chemicals, petroleum, and engineering, as well as construction companies in the oil and gas industry.
In simple terms, MES helps manufacturers improve the ongoing management of their assets. Given the significant opportunity to use web-enabled technology and the industrial internet of things (IIoT) to improve asset performance, there's clearly a big growth opportunity ahead for the company.
In fact, the company's management is still expecting 10% to 12% growth in the annualized value of its license and maintenance contracts in 2020. Meanwhile, other industrial software companies have been reporting strong order growth in 2020 already.
So what
While Aspen remains a stock in growth mode, its growth in its fiscal 2020 might not turn out quite as strong as expected. For example, the market was disappointed when management said some deals had been pushed out into the third quarter from the second. This is either a classic sign of the beginning of a slowdown -- it nearly always starts with a delay in orders that then disappear -- or a temporary timing issue.
Frankly, it's hard to tell which one of those two options it is right now, but given signs of weakness in the industrial economy and the uncertainty created by the coronavirus, the market has decided to take a pessimistic view. For all the benefits generated by MES software improving productivity, if companies are cutting back on production then they will be under pressure to restrain spending.
Now what
Given the weakness in heavy industries and the fall in the price of oil in 2020 it wouldn't be surprising if Aspen saw more order delays in the third quarter. In other words, there's a lot of near-term risk coming up for the company. Long-term investors might not be particularly concerned, but they will also be need to tolerate some volatility in the coming quarter.
