This High-Growth Stock Is About to Break Free

Industrial software company PTC (PTC 0.62%) is one of the most exciting growth stocks. It's a technology leader in the so-called "fourth industrial revolution," whereby manufacturing is revolutionized through digital web-based technology that analyzes, monitors, and optimizes performance. There's a feeling that PTC hasn't quite had the big blowout quarter yet to demonstrate the rapid adoption of its growth products. Was the recent second quarter enough to change opinion and get growth investors excited again? Here's the lowdown.

Introducing PTC

The key to the investment case for PTC rests on three interconnected drivers. First, the ongoing adoption of its core products, computer-aided design (CAD), and product lifecycle management (PLM), representing around 71% of current revenue. Second, management expects its growth products, the Internet of Things (IoT) and augmented reality (AR), to generate torrid growth rates in the future and take over the growth baton in time. The growth products represent around 14% of current revenue. Third, management is aggressively transitioning its core products (CAD and PLM) into cloud-based software-as-a-service (SaaS) offerings, called "velocity," which represent around 4% of current revenue. 

Image source: Getty Images.

Focusing on the growth products, PTC's IoT solutions help connect customers' physical assets to the digital world, so they lie at the heart of the fourth industrial revolution. For example, an industrial plant production line can be connected to the digital world to analyze and improve its performance data digitally. Meanwhile, AR helps technicians service physical equipment with a digital overlay and even allows technicians to work on equipment without physically being present. 

The good news from the recent second-quarter 2022 earnings report is that management is beginning to demonstrate traction in terms of accelerating growth. 

PTC's growth prospects

Management's favorite metric to follow is the annual run rate (ARR), representing the "annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period." It's a useful metric for companies focusing on subscription-based models as their focus is on generating revenue over the lifetime of a subscription rather than a one-off up-front payment as it would be for, say, an on-premise on-license sale. 

PTC's management upgraded its full-year guidance for ARR growth -- a good result in an environment where many other industrially focused companies are lowering guidance due to supply chain issues, the war in Ukraine, cost inflation, and China lockdowns.

Data source: PTC presentations. 

Furthermore, during the earnings call, CEO Jim Heppelmann confirmed his expectation for a pickup in growth in PTC's growth product portfolio, saying, "We continue to expect IoT and AR to reach ARR growth of 20% or more by the end of the year."

Heppelmann's confidence is buoyed by mid-teens bookings growth that "together with improving renewal rates creates an acceleration bias for ARR growth." Moreover, the full-year guidance looks achievable. Management laid out what the company needs to do to meet the midpoint of its full-year guidance. I've replicated the table below. 

There's good reason to believe PTC can at least hit these numbers. For example, penciling in a conservative estimate for growth products ARR growth in the fourth quarter of 20% (based on Heppelmann's commentary above) means PTC would end fiscal 2022 with growth product ARR of $232 million. Using the figure below, the non-growth product ARR (everything else lumped together) would be $1,421 million, implying a year-over-year growth rate of 11.5% from the equivalent figure of $1,275 million in the fourth quarter of fiscal 2021. Given that the "non-growth product ARR" actually grew at 13% in the second quarter, and most industrial observers are expecting a pickup in growth in the second half of the calendar year in general, PTC's guidance looks achievable. 

Data source: PTC presentations. 

A blowout quarter?

In truth, the answer is no. It wasn't a game-changing blowout quarter. However, it was a good quarter of execution and indicated that PTC is gaining traction with its IoT and AR growth ambitions. Meanwhile, the transition to cloud-based SaaS solutions in CAD and PLM is also progressing as planned. As such, PTC is on a good track, and the stock remains one of the best ways to get exposure to a technological revolution that will inevitably happen.