This Software Giant Could See a Huge Lift From the Metaverse

Ansys (ANSS 0.80%) shares might be a compelling buy in the upcoming metaverse era.

In this video from "Beat & Raise," recorded on Dec. 3, Fool contributors Jason Hall and Jose Najarro discuss the company's bright growth prospects, given its position in niches that help bridge the gap between the digital and real worlds.

Jason Hall: Jose, talk to us about Ansys what's going on?

Jose Najarro: How is it going, Jason?

Hall: Good to see you buddy.

Najarro: This is why I enjoy doing this show because sometimes I find companies that are in markets, I enjoy. But I never knew anything about them and one of them is going to be Ansys. For those not familiar with this company, this is a software company that deals with real life simulation. Let's say you're an engineer, you want to develop some form of airplane and you want to test out this airplane, how it would do -- based on, how many people, the average weight of the cargo, what wind speeds it's happening. It gives you a simulation of -- hey, your plane will work.

Hall: In the actual physics involved that's incredible.

Jose Najarro: Yes. It's pretty awesome. Let me just share my screen right now to take a quick look at the company. They did report earnings quite a while ago, early November 3rd after the market closed. They have a market cap of about $33.4 billion. We can see one thing is, this is a lot of stocks are taking a hit. Ansys doesn't seem to be one of them right now. The market is doing a lot better than Ansys but it's not that far behind. Quarter 3 revenue was $445 million, and that showed about a 20 percent growth, and they did beat analyst's expectations. This is a profitable business with earnings per share of a $1.59. It also beat analyst's expectations. They did give a quite wide range in outlook for quarter 4. On the lower end, it would have almost been like a flat year. On the upper end it would be about $655 million revenue for quarter 4, and that would estimate about a 4.3 percent year-over-year growth. They're expecting either flat to very low single digit growth for the upcoming quarter. Like I said, very profitable company right now, operating cash flow of 157.8 million this quarter. Over 25 percent cash flow margins, we also saw it was profitable in cap earnings. They do have a strong deferred revenue and backlog of almost $900 million foreseeable revenue. This is normally the case with a lot of these software companies, because most of them are usually either yearly subscriptions or longer, so they can foresee what revenue they are expected to grab within the next year or two. Some other highlights they did acquire another software company called Zemax and I believe those are privately owned company. This is more optical design, so let's say you're building some form of either laser or some form of fiber products, and you want to see how the light waves react in certain fiber, in certain glass. This is a software that works with it, so I believe it works well with the overall products that they are doing, they're doing these physical actual physics simulation. With the optical, with Zemax, they'll be the physics simulation, but in the optical world. I believe that was also a great acquisition for them. They do management in the overall earnings call, they did mention that one of the biggest concerns is that global pandemic and trade restrictions are affecting the company's revenue. As a software company, they didn't go a little deeper into it, but I'm guessing right now with things like supply chain issues, maybe engineer firms are not developing as many products as they normally would be, due to constraints and supplies or products. That might be affecting in the short-term, but overall, this seems like a nice stable company, and one that I will probably have in my radar now from the future see this one definitely takes a dip, and I can learn a little bit more about.

Hall: It's interesting, it's almost like, you think about another company that's very involved in computer-aided design, and that's Autodesk (ADSK -1.34%). Which also just reported pretty recently, I think we just talked about it yesterday. Jose, and it's interesting, Toby, excuse me, Travis Hoium was talking about it. By the way Travis is also an engineer by training like yourself. Their forecast for their guidance was maybe a little bit on the weaker side too. One of the things that they talked about is so many of their customers are just swamped. The upgrade cycle is almost preventing them from necessarily being able to do large-scale product upgrades. I'm wondering if maybe that might be something that's going on with some of Ansys customers as well?

Najarro: Yes. I mean, Autodesk is one I follow pretty regularly. A lot of my friends use Autodesk for my experience I've never use that. That's a little bit more of, I want to say mechanical and civil engineering, but Ansys is one that, after I read about it earlier today, I messaged a few of my friends and they use this software and they really enjoy it, so I'm happy to hear that.

Hall: Yeah, and also Autodesk. It's dominant. It is by far the largest player in its market and you think about things like the metaverse. You think about the growth and obviously, the things they do is a lot of like real-world design stuff, but the applications broadly, I think you're just going to continue to expand and the dominant players in those spaces generally continue to win.

Najarro: I agree, I mean things like the metaverse, even though it's some form of digital world in the future, it still needs to make sense. Physics needs to work. Exactly. A company like Ansys can definitely see some future in it.