Most Wall Street analysts rate PTC (PTC +1.44%) as a buy, with a consensus target price of $216, which is approximately 23% higher than its current value. The stock could be worth even more, especially as the company adds artificial intelligence (AI) to its products. Here's why.
PTC is getting smarter
The next step for artificial intelligence investing is to identify companies whose products are gaining value from built-in AI capabilities. PTC, which partners with Nvidia, is a great example of this trend.
NASDAQ: PTC
Key Data Points
In a nutshell, the company's suite of software solutions helps its customers work smarter. Its core end-market customers are mainly manufacturing companies, and its key selling point is enabling them to transform their businesses digitally. Industry observers discuss industrial revolutions, and if the third was the implementation of IT in manufacturing, the fourth emphasizes connectivity and the use of real-time data to continuously improve work processes.
PTC offers computer-aided design (CAD) software for engineers to design products digitally, as well as product lifecycle management (PLM) software to collect real-time data and manage products throughout their lifecycle. The goal is to create a digital thread using real-world data to build a digital twin that generates actionable insights to improve processes.
Image source: Getty Images.
Where artificial intelligence fits in
It doesn't take much imagination to see how integrating AI into PTC's products will enhance the quality of actionable insights -- a key advantage of using PTC's solutions.
Indeed, as CEO Neil Barua noted on the earnings call:
Customers understand that applying AI to siloed or stale data doesn't work and are turning to PTC's portfolio to build their data foundation. This begins in engineering and extends across other departments and functions throughout the life cycle. AI is then applied to this contextual data, and even more substantial transformations become possible for our customers.
PTC is an outstanding value
Even without the growth kicker from AI, PTC is an excellent value stock for growth investors. There are three main reasons for this.
First, management's guidance for free cash flow (FCF) of $1 billion in 2026 not only highlights the highly cash-generative nature of its business model (which is moving inexorably to more recurring revenue through software subscriptions), but it also makes the stock look like a great value.
Let's put it this way: The market cap is $20.8 billion, so that FCF target implies the company is generating 4.8% of its market cap in FCF, but with high single-digit growth in its annual run rate (ARR) of software subscriptions dropping down into mid-teens FCF growth, investors are getting a growth company priced as a mature industrial company.
Image source: Getty Images.
A scalable business model
Second, and building on the last point, PTC's management noted on its earnings release that "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."
While some analysts were disappointed by management's guidance of ARR growth of 7.5% to 9.5% in 2026 (lower than the company's medium-term target of low double-digit growth), the implication of slower expense growth is that profit and FCF margins will expand.
An improving industrial sector
Third, although it's not often discussed, the manufacturing sector has been experiencing a protracted slowdown over the last couple of years as companies have focused on reducing bloated inventories built up during the supply chain crisis created in the aftermath of the pandemic lockdowns. That weakness created a challenging end-market environment for PTC, but history suggests the cycle will turn again.
An AI stock to buy
While it's easy to understand AI consumer applications, a far larger impact is likely to come from its industrial applications, and PTC's Nvidia-powered AI solutions are at the forefront of this. The market has priced in a multiyear expansion in AI infrastructure providers. Now it's time to price in the companies that actually use AI to add value to the customer offerings, and PTC is one of them.
