With the stock already up more than 16% in 2021, industrial software company PTC (PTC -1.49%) has already rewarded investors this year, and it looks like there could be more to come. The latest first-quarter 2021 results saw management raise its full-year revenue and earnings guidance, and the company is well set for another strong year. Here's why.

Why PTC is an attractive stock for investors

The investment case for PTC is based on the idea that its pivotal role in the fourth industrial revolution, or Industry 4.0, will lead it to $700 million to $900 million in free cash flow in 2024.

As a reminder, PTC's core solutions include computer-aided design, or CAD, and product life-cycle management (PLM) software solutions. Meanwhile, its growth products comprise Internet of Things (IoT) and augmented reality (AR) solutions. All four of these product groupings are beneficiaries of the shift toward customers digitally transforming their businesses.

A digital factory

Image source: Getty Images.

In fact, the trend toward digitalization received a boost during the coronavirus pandemic as factory owners were made aware of the benefits of monitoring, controlling, and servicing their physical assets digitally (IoT and AR). It's a point reflected in the 30% increase in year-over-year bookings in the first quarter.

Indeed, CEO Jim Heppelmann noted on the earnings call, "We see the booking strength is reflecting a continuation of the secular demand trends we experienced in fiscal 2020 as customers accelerated their digital transformation initiatives in response to the new way of doing business."

In addition, there are three other reasons to feel positive about PTC.

1. Current trading is strong

The table below shows the guidance increase in the quarter. Annual run rate simply refers to the annual value of PTC's active renewable contracts, a key measure for a software company selling subscriptions.

The change in revenue guidance means that management is now expecting 16% to 19% growth instead of the 6% to 10% it targeted previously. To be clear, around 20% of the increase in guidance comes down to favorable exchange-rate movements, and a further 35% comes down to the acquisition of Arena. However, around 45% of the increase came down to "the strong large deal activity and longer than anticipated contract durations," according to CFO Kristian Talvitie.

Clearly, PTC's growth is stronger than expected, and the company has very good sales momentum, driven by the 30% increase in bookings.

Management's Full-Year 2020 Guidance

Current

Previous

Annual run rate

$1,385 million to $1,420 million

$1,470 million to $1,500 million

Free cash flow

$340 million

$340 million

Revenue

$1,550 million to $1,600 million

$1,690 million to $1,730 million

Non-GAAP EPS

$2.65 to $2.85

$3.05 to $3.25

Data source: PTC presentations.

2. PTC's partnerships are adding growth

PTC's key partner is Rockwell Automation (ROK -1.15%). The two deepened their relationship in the fourth quarter by adding PTC's PLM and software-as-a-service (SaaS) solutions -- more on that in a moment. It's a natural progression and makes perfect sense given Rockwell's $1 billion strategic equity investment in PTC in 2018.

The partnership is opening up new markets for PTC, with Heppelmann noting that it delivered "over 20 expansion deals," and the majority of them come "in process industries that we have not traditionally targeted with our core products."

3. Software-as-a-service is adding growth and derisking PTC

PTC's purchase of SaaS product development platform company Onshape in 2019 positioned PTC to accelerate the shift of its on-premise software to the cloud. That deal was followed up with the recent purchase of SaaS PLM business Arena Solutions.

The deals are exciting for two reasons. Clearly, PTC now has the capability to offer clients on-premise and pure SaaS in the CAD and PLM markets. That should add growth in itself.

A worker using augmented reality.

Augmented reality is a major growth market for PTC. Image source: Getty Images.

The other, sometimes overlooked reason is that it derisks PTC's business. Let's put it this way: If the shift to SaaS in CAD and PLM accelerates strongly, it's essential that PTC be there to meet it. At present, SaaS only represents around 10% of PTC's revenue, but as Heppelmann noted on the earnings call, "at some point, our industry will really go to SaaS."

PTC looks strong in 2021

All told, the earnings and bookings update was excellent, and there's hard evidence that companies are accelerating their investment in digitalizing their business with Industry 4.0 solutions. That's great news for PTC, and investors can feel more comfortable with the company's long march toward $700 million to $900 million in FCF by 2024.