Cathie Wood's Ark Invest holds PTC (PTC 0.65%) as one of its top positions in The 3D Printing ETF (PRNT 0.58%), and for good reason. The industrial software company's solutions and growth catalysts embody the idea that artificial intelligence (AI) will significantly enhance the efficacy of software. The results of integrating AI into PTC's software are tangible, and the good news is that PTC's valuation is extremely attractive after its recent dip.
PTC's long-term growth prospects
PTC is a leader in enabling companies to digitally transform their product design, manufacturing, operations, service, and disposal processes. Its computer-aided design (CAD) software enables the design of a product; its product lifecycle management (PLM) software acts as a repository of all the data from that product's lifecycle; its application lifecycle management (ALM) service manages the software application lifecycle; and its service lifecycle management (SLM) offering manages the post-service lifecycle of the product.
NASDAQ: PTC
Key Data Points
The primary selling point of these software solutions in the digital age is their ability to work together in a "digital loop," whereby a manufacturer can utilize the insights gleaned from digital analysis of raw data from one part of the loop to enhance the entire process. For example, SLM might suggest changing the design of a product using CAD, and PLM will enable the monitoring and control of the changes as a result of that design implementation. The digital loop is an ongoing and iterative process that is revolutionizing manufacturing.
PTC infuses AI in its software
But here's the key question. What if AI can be used to enhance digital analysis, thereby adding value to PTC's solutions and ultimately enhancing the value it delivers to customers? That's precisely what PTC is doing, and it will inevitably improve computational power and the efficacy of the digital loop.
As CEO Neil Barua said on a recent earnings call: "Our confidence in fiscal '26 is underpinned by our focus on our intelligent product life cycle vision. AI is cementing the importance of structured product data foundations." He continued, "We're enhancing our CAD, PLM, ALM, and SLM offerings to make it even easier to build a product data foundation, and we're embedding more AI."
If the power of digital analysis is the key to increased adoption of PTC's software solutions, then AI will only improve them.
Image source: Getty Images.
PTC stock is a great value
Before considering buying PTC stock, it's essential to remember two key points. First, the industrial sector, and manufacturing in particular, has been in a protracted slowdown over the last couple of years. Here's how the latest report from the Institute for Supply Management presents the situation: "Economic activity in the manufacturing sector contracted in October for the eighth consecutive month, following a two-month expansion preceded by 26 straight months of contraction."
As such, PTC hasn't received much cyclical help lately from conditions in the U.S. manufacturing sector.
Second, the key metric to measure its long-term growth, and one that governs its free-cash-flow (FCF) growth, is its organic annual run rate (ARR), representing the annualized value of its subscriptions and contracts.
ARR growth has slowed in recent years, and management's forecast for 2026 is below the low-double-digit percentage growth rate that management is targeting. Indeed, that guidance is a large part of the reason for the stock selling off after its recent earnings report for the fourth quarter of its fiscal 2025, which ended Sept. 30.
|
Metric |
Fiscal 2023 |
Fiscal 2024 |
Fiscal 2025 |
Fiscal 2026 (Estimated) |
|---|---|---|---|---|
|
ARR |
$2.047 billion |
$2.285 billion |
$2.478 billion |
$2.673 billion |
|
Organic ARR growth in constant currency |
13% |
12% |
8.5% |
7.5% to 9.5%* |
|
Free cash flow |
$587 million |
$736 million |
$857 million |
$1 billion* |
|
FCF growth |
41.1% |
25.4% |
16.4% |
16.7% |
Data source: PTC presentations. *Excludes the impact of divestitures, which is estimated at $160 million in one-time transaction-related costs.
Still, the sell-off is a good buying opportunity:
- The forecast ARR growth rate at constant currency is still in the high single-digit percentages, and would be higher if not for the sluggishness of the manufacturing sector.
- FCF continues to grow faster than ARR, in line with management's expectations, as PTC's expenses tend to increase at half the rate of its ARR growth.
- Underlying FCF of $1 billion in 2026 would put PTC on a price-to-FCF multiple of 21.5 -- cheap for a company with its ARR and FCF growth rates.
Image source: Getty Images.
A stock to buy
Despite challenging end markets, PTC has continued to grow its key metrics. Its valuation is compelling, and the added growth driver of increasing infusion of AI into its software will add value and growth in ARR. If Wood's belief in the power of AI in software and PTC is justified, then PTC is a good investment opportunity at this time.
