Workflow technology company Trimble (TRMB -0.25%) has several exciting growth drivers that can send its stock price higher in the coming years. Furthermore, they are already in place, and investors can see the evidence of their progression in the numbers. This isn't a speculative growth stock; it's a growth stock with established technology in the early innings of adoption.
Trimble's growth drivers
The average U.S. 40-year-old investor has over $150,000 in an equity portfolio. While there's no definitive agreement on the number of stocks you need to diversify a portfolio, around 15 stocks are often seen as typical of a more enterprising, risk-seeking investor. In contrast, a portfolio of 30 or above represents a more conservative investor looking to diversify.
As such, investing $10,000 in Trimble will suit a more enterprising investor, but if you are a more conservative investor, $5,000 might suit you better. Alternatively, adjust the position size as appropriate to your portfolio size.
Trimble's origins lie in its hardware solutions, which provide precise positioning using global navigation satellite systems. As such, it's a well-known name in architecture and construction, what management calls "field systems" (civil engineering, geospatial, and other advanced positioning), and transportation and logistics.
However, its present and future lie in the growth of its software solutions, which use the data created by its hardware for modeling and data analytics purposes on an ongoing and connected basis. Consequently, Trimble's solutions are becoming an increasingly important part of its customers' daily workflows.
Major hardware manufacturers across its target markets appreciate Trimble's capacity to generate value, as evidenced by its existing partnerships with Caterpillar, Liebherr, and Deere. Trimble also competes with Deere via its 15% stake in a joint venture with AGCO in the precision agriculture sector.
Image source: Getty Images.
The shift toward recurring revenue from software lies at the heart of five key growth drivers for the company:
- The change in revenue mix to software subscriptions from hardware and perpetual software implies improving profit margins, as (based on 2024 full-year numbers) the former has a near 84% gross margin compared to almost 46.5% for the latter.
- The shift to recurring revenue, measured by annualized recurring revenue (ARR), helps de-risk future revenue, improves financial modeling and the predictability of cash flows, and makes customers more "sticky," particularly if the software/services relate to daily workflows.
- Increasing recurring revenue also creates a significant cross-selling and upselling opportunity for Trimble as it introduces new solutions to new customers.
- The growth of artificial intelligence (AI) applications and the adoption of advanced analytics add more value to Trimble's solutions.
- Ultimately, the increase in ARR will improve free cash flow (FCF) as billing is automated, and the predictability of cash flows means Trimble doesn't have to keep cash on hand for contingency purposes.
The numbers to prove it
I will run through the bullet points in turn. The relative increase in subscription and recurring services has resulted in an upward drift in its overall gross profit margin.
TRMB Gross Profit Margin data by YCharts.
CEO Rob Painter revealed that net retention for Trimble's core architects, engineers, construction, and owners (AECO) segment remained at approximately 110% over a trailing 12-month basis, showcasing increased customer loyalty and upselling/cross-selling potential.
A 100% retention ratio implies that a company's existing customers continue to spend the same amount in aggregate as in the previous period. However, a rate of 110% implies that Trimble is getting 10% more out of those existing customers compared to the last period -- a demonstration of its ability to increase ARR by cross-selling and upselling solutions to a loyal customer base.
As for AI, Trimble is already selling AI-powered solutions to customers. While it's too early to see it demonstrably in the numbers, it's hard not to think that AI will add value to the solutions of a company whose key growth driver is data analytics, connecting the physical world to the digital world in real time.
Image source: Getty Images.
Free cash flow and valuation
The improvement in FCF coming from mid-teens growth in ARR (management expects adjusted organic ARR growth of 13% to 15% in 2025) is implied in management's guidance and the Wall Street consensus. After adjusting for $253 million in cash taxes relating to the AGCO joint venture and $35 million in mergers and acquisitions costs, and adding it back to the Wall Street consensus for FCF in 2025 of $395 million, Trimble's underlying FCF in 2025 would be $683 million.
The Wall Street consensus of $791 million and $906 million in 2026 and 2027 implies a growth rate in the mid-teens, making the stock look like an excellent value. It trades at less than 22 times expected FCF in 2026 and has many long-term earnings drivers, as outlined above.
Whether you invest $10,000, $5,000, or just $1,000, the company's mid-teens FCF growth rate and long path of growth ahead make it an excellent stock for long-term investors looking for a growth stock to add to their diversified portfolio.
