Down 58%, This Cathie Wood Tech Stock Is a Screaming Buy

It's not often that investors look at an industrial technology stock as a value play, and it's even rarer that investors talk about a Cathie Wood stock in terms of its excellent cash flow generation, but that's the case with Trimble (TRMB 1.59%) right now. The positioning and workflow technology company is one of the top five holdings in two ARK funds, and I believe its recent dip is a buying opportunity.

Trimble disappoints the market

Perhaps "dip" is something of an understatement. Trimble's stock is now down 17% in a month and 55% from its all-time high. The nosedive continued after the disappointing third-quarter earnings announcement. Furthermore, management revised down its annual revenue and earnings forecast due to weakened end markets, which disappointed investors.

The company announced:

• Full-year revenue guidance of $3.757 billion to $3.797 billion, compared to prior guidance for $3.845 billion to $3.925 billion, a 2.8% decline at the midpoint of revenue guidance; and
• Non-GAAP earnings per share (EPS) of $2.58-$2.66, compared to prior guidance for $2.57-$2.73.

The midpoint of the earnings guidance reduction takes estimated earnings to $2.62 from $2.65, a reduction of 1.1%. That might not seem huge, but investors wouldn't want these trends to continue into 2024.

Trimble warns of slowing end markets

On the earnings call, the commentary highlighted some weaknesses in its end markets.

Trimble offers positioning products (hardware and perpetual license software) and subscriptions and services (software, term licenses, maintenance & support, and services) for tracking and positioning assets at scale. The company's history lies in offering pure positioning-related products and services, but the future lies in becoming an ever-more-integrated part of its customers' daily workflow. Think of trucking fleets being monitored and routes optimized in real time, precision agriculture, the precise management of construction/infrastructure projects, and geospatial mapping.

Unfortunately, some of these markets are cyclical, and Trimble is seeing weakness in them. CEO Rob Painter sees "the downturn in residential construction impacting our hardware businesses in both Buildings & Infrastructure and Geospatial." Furthermore, he noted, "In agriculture, within Resources and Utilities, we see emerging signs of weakness also notably in Europe." And "[i]n transportation, I think it's safe to say that we are in a down freight market."

Image source: Getty Images.

The critical metric investors need to follow

While it's never good news when a company lowers guidance, investors must see the action within context. While there's little the company can do about its end markets, it will continue executing its "connect and scale" strategy. The connect bit refers to offering a range of products that connect with each other and share real-time data, while the scaling refers to the use of data analytics to create systems and processes.

The successful execution of this strategy should translate into growth in Trimble's annualized recurring revenue (ARR), defined as the annualized value of its "subscription, maintenance and support, and recurring transaction revenue for the current quarter".

ARR growth is arguably a more critical metric than revenue growth because it implies increased cash flow in the future. The good news is management sees ARR growing 13% in 2023, to around $2 billion. Discussing the outlook for 2024, outgoing CFO David Barnes forecasted, "We believe ARR will continue to grow at a double-digit rate."

For reference, an ARR of $2 billion in 2023 would mean it's grown at a compound annual growth rate of 15.4%, since it had an ARR of $1.3 billion at the end of 2020. The strength in ARR growth and the potential for ARR to drop down into free cash flow (FCF) are why Wall Street analysts see FCF of $600 million in 2023, growing to $758 million in 2024.

Is Trimble stock a buy?

To be clear, declining product sales are not good news, and subscription and services revenue won't continue to grow over the long term if product revenue continues declining.

Data source: Trimble presentations.

That said, management believes its hardware business has "stabilized" after declines in 2023, and its ARR continues to grow at an impressive rate due to the success of its "connect and scale" strategy. All other things constant, FCF is set to grow substantially, and when Trimble's product sales gets a push from an improving economy, investors should see it in improved revenue growth.

The underlying growth in ARR offsets the near-term weakness in product sales caused by a slowing economy, and Trimble will emerge as a stronger company when the economy improves. As such, it's an attractive proposition at the moment.