2022 was a rotten year for most software stocks. Many were heavily sold off due to a combination of a valuation correction and a lowering of growth estimates. Infrastructure software company Bentley Systems (BSY -0.13%) was sold off to the tune of 17% over the last year.
Despite the sell-off, management maintained its underlying full-year 2022 guidance, and the passing of the $1.2 trillion Infrastructure Investment and Jobs Act in later 2021 strengthened the company's long-term growth prospects. As a result, Bentley Systems is an attractive stock to buy for 2023 and beyond.
A growth stock with exceptional long-term prospects
Operating as the leader in the infrastructure software market, Bentley Systems isn't a name that will roll off the average investor's tongue. However, other, perhaps better-known names, like Autodesk and Trimble, also operate in the market. They are attractive stocks in their own right. Still, Autodesk's broader exposure to construction and Trimble's exposure to transportation, farming, and construction mean that Bentley is the "go-to" stock for investors looking for exposure to infrastructure software spending.
Infrastructure includes major civil engineering projects such as grids (electrical transmission and distribution and communications), roads and bridges, transportation, water and wastewater projects, municipal works, and resources (mining). Bentley positions itself as a leader in all these markets.
Bentley Systems benefits from the infrastructure bill
There are two reasons why Bentley is a great growth stock. First, spending on infrastructure is a critical part of the economy, and infrastructure requires constant maintenance. It's also received a shot in the arm from the $1.2 trillion Infrastructure Investment and Jobs Act. The legislation includes $110 billion for roads and bridges, $108 billion to upgrade the electricity grid, $66 billion for rail, $65 billion for high-speed internet, $55 billion for clean drinking water, and $50 billion for water infrastructure, as well as $650 billion for current infrastructure projects.
Whichever way you cut the numbers, the spending goes into end markets served by Bentley's software. And given that it's a pure-play infrastructure software company, it's clear that its long-term prospects have been enhanced in 2023.
Digitization of infrastructure projects
Second, on top of the general increase in infrastructure spending, Bentley has a significant growth opportunity coming from the digitization of infrastructure projects -- not least through the use of digital twins.
As the name suggests, these are digital models of physical assets or projects which can be used to gather, store, and analyze masses of data from the physical asset. The data is then used to simulate the physical assets' behavior in the digital twin to produce actionable insights to improve, adjust, or maintain a project or an asset.
To understand the importance of digital twins in infrastructure, it's necessary to reflect on the nature of infrastructure projects. They tend to involve massive expenditures in complex one-off projects involving many different contractors and participants, all creating their data. Moreover, given the nature of projects, the contractors working on them (say, on a hydroelectric plant) may only do it a few times in their careers -- meaning that project success can't rely on "know-how" and purely experiential knowledge.
These projects -- say, a bridge or a wastewater plant -- will also be used for decades after initial completion, and they need maintenance.
Digitization, and digital twins, help improve all these things. By digitally modeling a project, all the data can be stored in one place instead of disparately in files across many contractors. The modeling can significantly help in dealing with the complexity of the work and improve the project's completion time (potentially saving considerable sums in cost runs, and avoiding costly delays in operating, for example, roads or power plants).
Meanwhile, the mass of data can be analyzed and used to create actionable insights that improve maintenance over many years and facilitate future adjustments (for example, putting new cabling in a road).
A software stock to buy for 2023
Turning to the near-term outlook, on November's third-quarter earnings call, management affirmed the full-year 2022 financial guidance originally given in March. Consequently, management believes it will grow full-year revenue in constant currency at a 16.9% to 20.1% rate in 2022.
Trading on a forward enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) or around 30 times EBITDA, Bentley is not a conventionally cheap stock. Still, that valuation is better than it's been in a decade.
Data by YCharts
All told, Bentley Systems' future is bright, and the dip is creating a good entry point into a company with an exciting future underpinned by megatrends in infrastructure spending.