It's been a tough year for the overall market, but it's been even worse for tech stocks. While the S&P 500 (^GSPC 0.02%) is nursing a 24% loss in 2022, the S&P 500 Information Technology index is down to the tune of 30%. Ouch!
But not every tech name has been caught up in this sweeping headwind. Share prices of software outfit Aspen Technology (AZPN -0.55%) are up more than 50% so far this year after hitting record highs -- again -- in late September.
Past performance is no guarantee of future results, of course. On the other hand, a tech stock ticker dishing out this much unlikely bullishness deserves a closer look.
What's Aspen Technology?
It's not exactly a household name. Aside from the fact that the company makes obscure software to help corporations optimize a variety of assets (like supply chain structures, manufacturing facilities, and even artificial intelligence initiatives just to name a few), Aspen's market cap is a modest $15 billion. That's keeping it off of many investors' radars.
Don't let its small size fool you though. As the old saying goes, good things come in small packages.
In this case, the good thing is growth. Aspen is producing plenty of it. The current fiscal year's top line is projected to swell by nearly 60%, reaching almost $1.2 billion as a result. That's a tough act to follow, and Aspen Technology isn't expected to grow nearly as briskly in the following fiscal year (ending in June). Indeed, the analyst community is only calling for revenue growth of a little more than 10% for fiscal 2023. Still, per-share earnings are on pace to grow from last year's $5.78 to $6.75 this time around to an impressive $7.64 per share next year.
Data source: Thomson Reuters. Chart by author. Revenue figures are in millions of dollars.
Given the wobbly state of the global economy, that optimistic outlook is a breath of fresh air for investors looking for compelling opportunities.
And this particular opportunity may be far better founded than most investors realize.
Aspen is in the right place at the right time
The broad assumption is that companies hunker down when the economy is weak, cutting whatever spending they can to offset any sales slowdown. And this assumption often holds water.
But it isn't universally applicable. That's particularly the case when the spending in question plugs into the value offered by the likes of Aspen Technology.
College professors Vijay Govindarajan and Anup Srivastava arguably explained it best earlier this year with an article in Harvard Business Review. Commenting on how businesses should prepare for what looked like a serious economic slowdown at the time, the pair write:
It is not the time to slow digital transformation. On the contrary, it's the time to accelerate it. ... Digital transformation may not solve all the problems, but it can mitigate them.
The piece goes on to point to multiple examples of how digital transformation has already proven its value, allowing enterprises to do things like "understand buying behaviors, adjust promotions and special offers, personalize product recommendations, tweak pricing on the fly, and balance supply with fast-changing demand and customer preferences."
That's largely what Aspen Technology does, although Aspen's software isn't quite so consumer-facing.
And Srivastava and Govindarajan aren't the only experts suggesting economic weakness is a time to lean in on digitalization in an effort to improve profitability by improving efficiency. International Business Machines' Enterprise Strategy unit's senior consultant Liz Davis and associate partner Mimi Bulfin wrote in a blog post last month, "Even during a period of stagflation, enterprises can apply technology to drive rapid and sustainable business growth." The key is "striking a careful balance between cost optimization and growth," which again ultimately requires the use of digital tech.
IBM Consulting managing partner Jonathan Wright separately echoed the idea in September, saying, "To effectively combat the unprecedented supply chain stressors like inflation, it's imperative that CSCOs [Chief Supply Chain Officers] focus on using analytics, AI and automation initiatives to build intelligent, resilient, and sustainable supply chains." A related survey performed by IBM indicates those companies that did the most to facilitate a data-led evolution are, on average, reporting 11% stronger annual revenue growth than those organizations that didn't do as much.
This edge may be the difference between thriving in a weak economic environment, or merely surviving it; it certainly explains why Aspen Technology is expected to hold up so well through next fiscal year despite worries that a recession looms.
And make no mistake -- Aspen Technology is one of the best at what it does. Just last month research and advisory firm Verdantix deemed Aspen a "Leader" within the Asset Performance Management arena, citing the company's "market leading capabilities in asset health monitoring and failure prediction."
A hidden gem worth owning
A perfect, bulletproof investment? There's no such thing. A consistently rising stock doesn't necessarily make Aspen Technology buy-worthy for newcomers, either, since hot stocks have a funny way of running out of fuel just when you step in.
There's a good reason this particular off-the-radar ticker has defied the bigger downtrend, though. That is, the underlying company is built to perform in almost any environment, good or bad. A few investors have already found it, but priced at only 31 times next fiscal year's expected earnings, there's room for more.
