It's not often that you can make an investment case for two growth stocks based on their free cash flow (FCF), but I think that's the case for Trimble (TRMB -1.08%) and PTC (PTC -1.00%) right now. Both stocks are set to increase their FCF significantly in the coming years and are highly attractive to investors. Here's why. 

Trimble positions itself for growth

With just $348 million in FCF in 2022, nobody is buying Trimble based on its recent cash flow generation. After all, its $13.1 billion market cap means it trades on 26.6 times its trailing FCF. Put another way, it generated just 2.7% of its market cap in FCF. Throw in that Trimble's sales were flat in 2021, and it's not hard to see why investors taking a superficial look might walk away from the stock. 

However, I think that would be a mistake for three reasons. 

First, Trimble's organic sales growth was 7% in 2023, with the adverse effect of foreign currency movements and divestitures pulling down its reported growth rate. 

Second, the company's FCF in 2022 was negatively affected by a change in tax legislation that pulled forward tax payments and the need to build inventory (up by $39 million in 2022). Both those issues will normalize over time, and management's FCF guidance for 2023 calls for "Approximately 1X non-GAAP net income."

Third, given that non-GAAP EPS (which uses non-GAAP net income to calculate it) is for $2.66 to $2.86, it implies a forward price to FCF multiple of a little over 19 times FCF, dropping to just 16.6 times in 2024 based on Wall Street analyst forecasts for $786 million in 2024. 

Why Trimble is a growth company 

Trimble sells hardware, software, and services to customers in the transportation, agriculture, construction, and geospatial industries. While its roots lie in positioning, it's building out its "connect and scale" strategy to be an increasing part of its customers' daily workflow.

Crop farmers can become more productive through precise measurement and analysis of their activities. Transportation fleets can be monitored to produce data that can be used to optimize routes iteratively. Construction/infrastructure companies can reduce waste and improve productivity through the precise management of construction projects. 

This shift implies a higher share of revenue from higher-margin software and recurring software revenue. As such, Trimble has an excellent record of growing profit margin over time. A combination of increasing adoption of its technology and margin expansion, coupled with strong FCF growth in the coming years, make Trimble an excellent growth stock to pick up on weakness. 

PTC enters a new era

This industrial software company believes in a "new era of free cash flow growth and stability" based on annual run rate (ARR) growth and underlying FCF conversion. PTC defines ARR as 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 common metric used in the software industry to define underlying growth, as it better reflects the potential for revenue and cash flow over a customer's lifetime. The good news is that PTC continues to grow its ARR at a mid-teens percentage rate and expects to do so in 2023 as well.

Meanwhile, management expects to accelerate its FCF generation from $416 million in 2022 to $575 million in 2023 and $700 million in 2024 -- Wall Street expects $873 million in 2025. This would be a compound annual growth rate of 28% from 2022 to 2025. As such, a price to FCF multiple of 25 times in 2023 is an excellent multiple for such a high-growth stock. 

PTC's long-term growth trends

Like Trimble, PTC will face headwinds in 2023 due to the slowing economy. However, its software offerings have strong secular growth trends behind them, not least because PTC is at the forefront of the industrial sector's digitization. The growing adoption of digital technology in designing products (computer-aided design, or CAD), then digitally managing them (product lifecycle management, or PLM), and connecting them with the digital world (Internet of Things, or IoT) is at the heart of the digital revolution. 

The increasing use of advanced analytics and digital technology to model physical assets creates vast opportunities for users to cut costs and better manage their assets. Investors can feel comfortable that PTC (the global PLM leader and a major CAD and IoT player) has multi-year growth prospects.