Cathie Wood loves positioning and modeling technology company Trimble (TRMB 0.89%). It's one of the most significant holdings in the ARK Autonomous Technology & Robotics ETF (ARKQ 1.77%) and the ARK Space Exploration & Innovation ETF (ARKX 0.98%). It's not hard to see why, as the stock offers a compelling mix of growth and value. Here's why Trimble is an outstanding stock to buy, even though the stock is down 26% over the last year. 

What Wall Street thinks about Trimble 

The Wall Street analyst consensus for Trimble has earnings before interest, taxation, depreciation, and amortization (EBITDA) growing at a 10% compound annual growth rate to 2025. Furthermore, the stock's cash flow is growing such that, based on the current market price of $48 and Wall Street estimates, Trimble will trade at 18 times its free cash flow (FCF) for 2023 and 15.6 times FCF in 2024. They are very cheap multiples for a company with such attractive end markets (more on that in a moment).

As such, the Wall Street consensus price target is about 16% higher than what the stock trades at.

Trimble's growth potential 

Trimble sells hardware and software for positioning, modeling, and analyzing data across four primary industries. Namely, infrastructure and construction (modeling construction activity in real-time and helping ensure accuracy and productivity), transportation (for example, real-time modeling and analytics of trucking fleets), agriculture (precision agriculture to help farmers use equipment to improve crop yields and productivity), and geospatial (mapping and data management for use in engineering, surveying, and geographic information system). 

It's an exciting growth industry because a data analytics and connectivity explosion means customers can integrate Trimble's solutions into their daily workflow. For example, project managers on a construction site can precisely monitor and manage the delivery of trucks to a site with restricted access, therefore improving efficiency and reducing waste. Trimble aims to expand the addressable market of its solutions while growing its profit margin by increasing the software component of its sales -- its software tends to come with higher margins. 

Precision agriculture.

Image source: Getty Images.

Current trading

The recent results saw an unusual dynamic whereby its reported revenue fell by 3% on an organic year-over-year basis. Still, its gross profit margin increased to 61.3% compared to 55.3% in the same quarter a year ago. Ultimately, gross profit came in at $561 million compared to $550 million a year ago.

The reason for the revenue decline comes down to a combination of loss of revenue from Russia and coming up against a difficult comparison with the first quarter of 2022 -- when the supply chain crisis started to ease, and Trimble found it easier to deliver on its backlog. The increase in gross margin largely reflects the shift in the sales mix toward relatively more subscription and services revenue (up 12.6% year over year) and relatively less product revenue (down 23.3% year over year).

Still, management expects revenue growth to return for the balance of 2023. Its full-year guidance calls for 2% to 5% organic revenue growth and organic annualized recurring revenue (ARR) growth in the "mid-teens." ARR is defined as "the estimated annualized value of recurring revenue, including subscription, maintenance and support revenue, and term license contracts for the quarter" -- a critical metric that serves as a better measurement of its underlying growth. 

An investor looking at data.

Image source: Getty Images.

What the market is worried about

Aside from the usual headline risk of a slowing economy hitting Trimble's growth rate, the market is possibly concerned with trading at Transporeon, a recently acquired transportation management platform. Slowing demand has led to a shift "toward a greater percentage of contract over spot transactions, which are monetized at a lower rate," and management's updated guidance for revenue of $135 million from Transporeon in the next three quarters is "approximately 10% below what we communicated in December," according to CEO Rob Painter. 

Frankly, this is a double disappointment because the Transporeon deal looked overpriced from the start. For example, the deal's enterprise value (EV) -- market cap plus net debt -- was $1.88 billion, and back in December, Trimble thought Transporeon would generate $190 million in revenue in 2023, with a 30% adjusted EBITDA margin. In other words, Trimble thought it was paying $1.88 billion for $57 million in EBITDA in 2023, meaning an EV/EBITDA of a hefty looking 33 times 2023 EBITDA. However, the multiple will be even more significant now that management has downgraded expectations for Transporeon's revenue. 

Does it matter?

Yes and no. Yes, in the sense that it's never good news for a company to invest shareholders' money in a business whose end markets promptly deteriorate -- mainly if the multiple was very high to begin with. 

No, because the market appears to have overly punished Trimble for the deal, and its underlying business remains in growth mode. The negative sentiment around the deal creates a buying opportunity in an attractive growth stock trading on a good valuation. That's probably why growth investors like Cathie Wood have been buying the stock this year.