Bentley Systems (BSY 0.34%) is a growth stock with a big future. The infrastructure-engineering software company is a leader in its industry and offers investors a unique combination of exposure to infrastructure spending (a bipartisan-supported activity) and the exciting megatrend of digitizing engineering processes. This combination is reflected in a company whose technology demonstrably saves public sector money.
Introducing Bentley Systems
Founded by the remarkable Bentley brothers (five of whom had senior involvement at the company and four of whom still sit on the board today), the company is a leading player in a niche market. To quickly understand what Bentley's software solutions do, it's a good idea to consider how traditional infrastructure projects were carried out.
NASDAQ: BSY
Key Data Points
In the pre-digital age, incredibly complex infrastructure projects were designed and developed by many engineers, contractors, and project managers, all of whom held a considerable amount of disparate data (usually in paper form) in their hands. As such, it's not hard to immediately see the potential for significant cost overruns and waste (things the infrastructure industry is notorious for) in this context.
Moreover, large infrastructure projects may occur only once or twice in an engineer's lifetime. Unlike the continuous, iteratively refined manufacturing process, such as in a bottling plant or in the manufacture of machine parts, infrastructure engineers don't have much experience in doing precisely the same project repeatedly.
That's where Bentley Systems comes in. Its infrastructure-engineering software enables users to create digital 3D designs and documentation for major projects, including bridges, buildings, cities, processing plants, roads, renewable energy projects, and rail systems. As such, the mass of data is stored digitally and is easily accessible by multiple users, enabling better management and monitoring of infrastructure projects along with cost reduction, waste minimization, and better maintenance of projects.
Image source: Getty Images.
Digital twins
In addition, Bentley has a significant, long-term growth opportunity from the growing adoption of digital twins in infrastructure engineering. A digital twin is simply a digital model of a physical asset. The model can simulate to better predict the behavior and progress of the physical asset through its design phase to construction, use, and maintenance. By storing the data centrally and constantly monitoring it with the involvement of multiple users, infrastructure projects can be better managed, completed, and maintained.
Bentley's numbers add up
The strength of its software lineup and the growing adoption of digital technology in infrastructure are clear in its financial metrics. For example, Bentley continues to grow its annualized recurring revenue, or ARR (a key metric in the software industry that includes the annualized value of contracts producing revenue) continues to grow at a low-teens rate.
That's impressive enough and indicates a strong growth path ahead. Moreover, not only is Bentley good at growing ARR, but it is also good at retaining and growing revenue from its existing customers. For example, its 12-month recurring net retention rate has been above 100% for at least six years.
Image source: Getty Images.
In plain English, this rate measures recurring revenue growth from existing accounts. In addition, its account retention rate (measuring revenue from existing accounts rather than recurring revenue) has been near 100% over the same period.
Consequently, Bentley has high visibility in its future ARR and revenue generation.
Bentley Systems valuation
As ever with growth stocks with a high amount of earnings visibility, the valuation on the stock won't be superficially cheap. Trading on 43 times expected 2024 earnings, Bentley Systems certainly fits that description.
However, with ARR and revenue growing at a low-teens rate and earnings and free cash flow growing at a mid-teens rate, Bentley will likely grow into its valuation. This is driven by ongoing infrastructure investment and the benefits of digitizing infrastructural projects.
Will it make you a millionaire?
Let's put it this way: A price to free-crash-flow (FCF) multiple of 33 is fair for a long-term growth stock, and based on Wall Street analyst estimates, that's what Bentley will trade on at the end of 2025 based on the current price. If it can grow cash flow at a 15% rate for the next decade and then a 10% rate for the decade after that, and the share price grows in line with earnings, then $100 thousand invested in it now will be worth $1.05 million over the next two decades.
While that's out of range for most investors, the return is indicative of a potentially good investment.
