Industrial technology company Trimble (NASDAQ:TRMB) is the largest holding in Cathie Wood's ARK Space Exploration & Innovation ETF (NYSEMKT:ARKX), and it's the second-largest holding in the ARK Autonomous Technology & Robotics ETF. Given that the much-admired fund manager has put that level of support behind it, it's worth taking a closer look at the stock and why it might suit growth-orientated investors right now.

Introducing Trimble

The company sells hardware, software, and services that use satellite technology to help clients position and model their physical assets or activities. Trimble's roots lie in global positioning systems (GPS), but its ambitions have expanded over the years. With the advent of more sophisticated technology, Trimble's solutions have become productivity enhancers that help clients create an "integrated work process."

Smart farmig.

Image source: Getty Images.

For example, Trimble's technology is used by farmers to steer and control tractors, in construction to guide heavy machinery with precision (Caterpillar is a joint-venture partner), and in logistics to monitor and manage trucking fleets remotely. For reference, 99% of the top 200 trucking fleets in the U.S. use the company's technology.

The case for buying Trimble stock

There are three interconnected arguments for buying the stock:

  1. The company has myriad growth drivers, and new markets and opportunities will open up due to the explosion in data analytics and productivity enhancements through digital technology adoption.
  2. Margins and free cash flow generation will expand rapidly as higher-margin software and services become a more significant part of Trimble's sales mix.
  3. The company's quality of earnings will improve as a growing percentage of its revenue is coming from recurring sources, thus de-risking the stock.

What are Trimble's growth drivers?

Trimble's key end markets are geospatial (surveying and mapping companies), construction (helping engineering contractors complete projects with precision), agriculture (field navigation and crop management), and transportation (real-time fleet management).

Aside from the noticeable near- and medium-term boosts that a massive federal infrastructure package would give to these activities, they also have strong secular growth prospects due to the growth of digital technology. For example, construction contractors can take advantage of pinpoint accuracy in constructing a space truss based on a 3D model.

A space truss

Trimble's technology can help contractors complete projects with pinpoint accuracy. Image source: Getty Images.

Meanwhile, increased use of data analytics is helping farmers make better decisions as they plant and nurture their crops. Deere continues to invest heavily in its precision agriculture solutions and sees very high take-up rates of its technology. As such, Trimble investors can expect to see long-term growth as smart-farming is adopted on a wide scale.

Route optimization and capacity utilization are already the name of the game in transportation. As data-analytics capabilities improve, positioning data will only become more critical. Furthermore, the growth of electric vehicle fleets means operators will face the new challenge of optimally charging their fleets

Margin improvements

Trimble has two clear margin-improvement drivers in place. First, revenues from its highest-margin segments -- namely, buildings and infrastructure, and resources and utilities -- are growing more than revenues from its lower-margin geospatial and transportation segments.

In common with most other industrial companies, Trimble took a significant hit from the pandemic in 2020, which dragged on its 2018-2020 revenue growth rate.

Trimble Segment

2020
Revenue

2018-2020
Revenue Growth

2018-2020 Average
Operating Income Margin

Buildings and Infrastructure

$1.231 billion

13.2%

25.5%

Geospatial

$651 million

(10%)

23.9%

Resources and Utilities

$630 million

10.9%

31.4%

Transportation

$641 million

(15%)

14.2%

Data source: Company presentations.

Second, as Trimble generates more of its revenue from software and recurring sources, its margins will naturally rise. This should mean that its revenue growth will produce relatively larger increases in profits.

Revenue Type 

2018

2019

2020

Gross Margin 2020

Hardware

$1.515 billion

$1.415 billion

$1.319 billion

40.3%

Software

$485 million

$520 million

$509 million

86.4%

Recurring

$914 million

$1.122 billion

$1.161 billion

73.8%

Total*

$3.108 billion

$3.264 billion

$3.148 billion

59.1%

Data source: Company presentations. *Includes professional service and other revenue.

Is Trimble stock a buy?

Given the stock price's 190% rise over the last year, it's not surprising to see that Trimble now trades at relatively high valuations on a number of metrics.

TRMB EV to EBITDA Chart

Data by YCharts

On the other hand, Trimble is a stock with a long runway for growth ahead of it. The explosion of data analytics and digital technologies is likely to open up new growth areas for the company. Moreover, its profit margins should expand over time for the reasons outlined above. Indeed, Wall Street analysts foresee its operating margin expanding to 23.6% in 2023 from 22.8% in 2020, meaning operating income would grow by 30% to $933 million over the same period.

As such, Trimble is a growth stock, and a valuation of 34 times free cash flow is not expensive for a company with the possibility of double-digit percentage earnings growth over the long term. After the stock's recent strong run-up, cautious investors may want to wait in hopes of catching a better entry point, but Trimble still looks a good value for long-term investors.

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.