1 Great Software Stocks Down 10% To Buy And Hold Forever

Industrial software PTC (NASDAQ:PTC) is the kind of stock investors should consider buying on a downtrend. The company’s recent third-quarter results, for the period ending June 30, and commentary on its fiscal 2025 year were impressive in the current environment, and the company’s long-term growth is just beginning. Here’s why PTC is a great stock for long-term holders.

Attractive target markets

PTC software solutions help customers digitally transform their operations. From initial concept using computer-aided design (CAD) to product lifecycle management (PLM) leveraging Internet of Things (IoT) solutions such as digital twins or augmented reality (AR) to increase productivity, PTC solutions are here to improve outcomes.

PTC’s solutions operate as part of a so-called “digital loop,” which continually feeds data into the loop so that the company can iteratively improve its operations. A real-world example would be a company discovering that it could significantly reduce its manufacturing costs (using PTC’s PLM software) if the product was redesigned (using CAD) in a specific way.

The benefits of such solutions will grow as analytics improve and customers move toward digital adoption. These are unique fundamental and secular growth drivers, and PTC is well-positioned to take advantage of them.

Growth through cross-selling solutions

As mentioned above, the closed-loop nature of the PTC Solutions range means that there is the potential to upsell products to customers who only own one, distinct part of the PTC Solutions range.

This is especially significant given that current PTC CEO Neil Barua was previously CEO of ServiceMax, the service lifecycle management (SLM) business PTC acquired in early 2023. In a previous earnings call, Barua noted, “Our focus has been on cross-selling ServiceMax to our strong, trusted customer base.” This is just one example of one solution PTC can use to generate growth from its existing customer base.

ARR growth

A key metric PTC uses to measure its growth is annualized growth rate (ARR). It represents “the annualized value of our portfolio of active software, cloud, SaaS, and support subscription contracts at the end of the reporting period,” according to the company. As such, it’s a better metric to evaluate a company by, since ARR will regularly drop off to free cash flow (FCF).

Management claims that “in the medium term we expect free cash flow to grow faster than ARR” and this is exactly what the analysis of PTC’s indicators in recent years confirms.

The story continues

Data source: PTC presentations.

While management has not yet provided formal guidance for 2025, during a recent Q3 2024 earnings conference call, CFO Kristian Talvitie suggested that PTC could forecast ARR and FCF growth in the low double-digit range of $825 million to $875 million.

For comparison, the midpoint of the FCF range is $850 million, which, if realized, would mean PTC would have less than 24 times FCF in 2025 based on the current valuation.

This is an excellent valuation, provided that ARR grows at a double-digit rate and FCF at an even faster rate.

PTC can also play defense

Another attractive aspect of PTC is its ability to adapt to downturns in its target markets. While the company continues to generate excellent growth, it operates in target markets that still present challenges. For example, management has consistently cited difficulty closing rates on large deals.

According to Barua, “We have a disciplined process for managing our internal expenses based on the level of ARR growth that we see.” Therefore, if ARR growth slows, PTC has the flexibility to reduce expenses and thus increase FCF generation to offset any upfront losses from new business.

Shares to buy

In summary, PTC remains one of the most attractive stocks to play in the digital revolution, and any significant weakening in the stock price is a good buying opportunity given its current valuation and outlook.

Is it worth investing $1000 in PTC now?

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Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends PTC. The Motley Fool has a disclosure policy.

1 Magnificent Software Stock Down 10% to Buy and Hold Forever – Originally published on The Motley Fool