The market is underestimating the growth potential of industrial and manufacturing software company PTC (PTC 4.13%). Simply put, its key metric, namely its annual run rate (ARR), continues to grow at a relatively high single-digit rate in a challenging trading environment. Ultimately, the growth in ARR will translate into free-cash-flow growth and a significant price appreciation for the stock.
PTC's underlying growth
ARR represents the "annualized value of our portfolio of active subscription software, SaaS, hosting, and support contracts as of the end of the reporting period," according to the company. In other words, it approximates what PTC is invoicing its customers on an annual basis. It's the key to growing PTC's cash flow, with management stating, "Over the mid-term, we expect free cash flow to grow faster than ARR, with non-GAAP operating expenses expected to grow at roughly half the rate of ARR."
NASDAQ: PTC
Key Data Points
The good news is that ARR continues to grow at an impressive rate and is on track for 8% to 9% growth at constant currency rates in 2025, and this is coming at a time when benchmark indicators of manufacturing growth, such as the Institute for Supply Management's Purchasing Manager's Index, indicate that the manufacturing sector contracted for 10 of the last 12 months to June. Throw in the uncertainty created by tariffs, and PTC's ARR growth is even more impressive.
A long-term growth stock
CEO Neil Barua believes this is due to the "mission-critical" nature of its software (a key component of the drive toward digital technology in manufacturing), which improves productivity, product quality, and the time-to-market in product development -- just one of the reasons why Autodesk was reportedly looking at buying PTC recently.
Image source: Getty Images.
Wall Street agrees, and the analyst consensus has mid-teens growth in FCF penciled in from 2024 to 2027, hitting $1.1 billion in 2027. That growth rate could improve, particularly if President Donald Trump succeeds in revitalizing the U.S. manufacturing sector and the digitization of the manufacturing sector continues growing at a strong rate.
