PTC Earnings: Organic Strength Visible Even With Boost From Recent Acquisitions; Raising FVE to $125

Narrow-moat PTC’s second-quarter earnings were solid, reflecting a slight beat on the top and bottom lines. Like Dassault Systemes, which reported this morning, PTC saw bookings weakness in China. But overall, PTC pulled through with solid organic and inorganic growth. We were pleased to see that the firm exceeded its own expectations for annual recurring revenue, or ARR, which we consider more telling than revenue performance. Looking beyond earnings, we’ve reflected on PTC’s cost of capital and we are now baking in a more favorable cost of equity for PTC, in line with peers Autodesk and Dassault Systemes. As a result, we are increasing our fair value estimate to $125 per share from $111 per share for the CAD and PLM software vendors. This change places the stock in fair value territory, though below FactSet consensus. In a nutshell, we believe the Street is not being as realistic in terms of PTC’s long-term addressable market, which we think is expansive but at some point limited by its more niche core than the likes of Autodesk or Dassault Systemes.