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3 High-Growth Stocks That Are Just Getting Started

By Lee Samaha - Jan 13, 2021 at 10:03AM

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The fourth industrial revolution is a key driver of growth for these three stocks.

Machine vision leader Cognex ( CGNX 0.08% ), industrial software company PTC ( PTC -0.58% ), and engineering simulation and design software company ANSYS ( ANSS -0.50% ) are companies in a hurry. All three are leaders in high-growth industries that have seen interest in their solutions increase as a result of the COVID-19 pandemic. Consequently, investors have every reason to believe their growth could accelerate in the coming years. Here's why.

Cognex Corporation

Cognex's machine vision solutions make it a major beneficiary of the trend toward automation in manufacturing and logistics. Using machine vision is a lot more accurate and cost effective than using humans to perform the same task. In a nutshell, digital sensors are placed in cameras in order to capture images that are then analyzed to guide, monitor, and control automated processes.

Mobile phone screens.

Cognex's machine vision helps smartphone manufacturers layer screens. Image source: Getty Images.

Consequently, Cognex's current key industries are the early adopters of automation, such as automotive and consumer electronics. Apple is Cognex's largest customer, using Cognex's systems to inspect and monitor the layering of screens on iPhones. The company should see strong growth as wide-scale adoption of automation spreads into other industries like logistics (e-commerce facilities, etc.), life sciences, food and beverage, airport baggage handling, and packaging.

Management sees Cognex having a 20% share of a served market (see chart below) of around $4.2 billion which is growing at a 12% annual rate over the long term. Wall Street analysts see a combination of end market and market share growth leading to $1 billion in sales and $1.44 in EPS in 2022.

Those figures would put Cognex at a 2022 price-to-sales multiple of 15 times and a P/E ratio of 59 times earnings. Frankly, those ratings look very rich to me, but all it will take is a few big deals -- such as the transformative Apple partnership -- and investors will be scrambling to increase their earnings estimates. 

Cognex tends to generate major deals in the second and third quarters, so look out for any guidance in the matter on the first-quarter earnings call, usually held toward the end of April.

Cognex's served market.

Data source: Cognex Corporation. Chart by author.

PTC

PTC, an industrial software company, divides its revenue streams into core and growth offerings. The core offerings are its traditional computer-aided design (CAD) and product lifecycle management (PLM) solutions, from which management expects high-single-digit to double-digit annual growth over the medium term.

Those figures are exciting enough, but they pale in comparison with the expectation that the growth offerings, namely internet of things (IoT) and augmented reality (AR), will grow at an annual rate of 30%-plus over the medium term.

As more and more companies seek to digitize their factories and connect their physical assets to the digital world, PTC is likely to see increased adoption of its software. By adopting digital technologies such as digital twinning, asset owners can create digital models that use real-time data to better operate, manage, and service their physical assets. Meanwhile, AR allows skilled technicians to service equipment without even being physically present. 

According to Wall Street analysts, it's all expected to add up to mid-teens revenue growth over the medium term, and PTC is estimated to hit $2 billion in sales and $3.54 in EPS in 2022, putting it at 7.3 times 2022 sales and a P/E ratio of 35 times earnings. I think that's a good value for a stock with such strong underlying growth prospects.

A worker uses a tablet to control the arm of factory machine.

PTC and ANSYS are beneficiaries of the trend toward digital factories. Image source: Getty Images.

ANSYS

The largest engineering simulation company in the world, ANSYS' software is a critical part of engineering design. If you want to model how a bridge or a semiconductor behaves, you are going to need simulation software. Similarly, simulation software is needed to predict how manufacturing processes will behave.

It's not hard to see the rationale behind PTC and ANSYS working together. PTC's ThingWorx IoT platform connects physical assets to the digital world and collects data, while ANSYS simulation software uses the data to predict outcomes. Similarly, PTC's CAD software, Creo, allows engineers to design a product while ANSYS' simulation software models the engineering properties of what's been designed.

Thinking about these examples, you can see just how ANSYS' simulation software is going to be a critical part of growth in digital twins, additive manufacturing, electric vehicles, 5G, and the industrial internet in general. Simply put, the digitization of the industrial world is adding new value to ANSYS solutions.

Management sees ANSYS growing revenue at a double-digit pace with $2 billion in 2022 and Wall Street analysts project $640 million in free cash flow in 2022, putting the company at a hefty-looking 31 times sales and 49 times free cash flow in 2022.

Stocks to buy?

Of the three, PTC is the most attractively priced, but all it will take is a few major deals in consumer electronics for Cognex to start to look like a good value. Similarly, of the digitization of the industrial economy accelerates in 2021 then ANSYS will surely see its earnings estimates increased. What can't be disputed is the fact that all three have very attractive long-term growth prospects.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Ansys, Inc. Stock Quote
Ansys, Inc.
ANSS
$393.13 (-0.50%) $-1.96
Apple Inc. Stock Quote
Apple Inc.
AAPL
$164.32 (0.34%) $0.56
Cognex Corporation Stock Quote
Cognex Corporation
CGNX
$76.04 (0.08%) $0.06
PTC Inc. Stock Quote
PTC Inc.
PTC
$110.26 (-0.58%) $0.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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