Industry Overview #1
Software solutions for the architecture, engineering, construction, product design, and manufacturing industries.
We've decided to launch a new monthly article where we'll share the estimated size of industries we're interested in, provide industry forecasts, identify key peers, and conduct financial comparisons using Koyfin (affiliate link with a 20% discount).
Personally, we conduct this analysis to narrow down potential investment candidates before selecting a company for deeper research. For our subscribers, the benefit lies in idea generation.
In our first issue, we're delving into the industry of Autodesk, focusing on software solutions for Architecture, Engineering, Construction, Building Operations, and Manufacturing sectors.
1. Key Competitors
Autodesk (Ticker - ADSK): Autodesk, Inc. is a global leader in 3D design, engineering and entertainment technology solutions, spanning architecture, engineering, construction, product design, manufacturing, media, and entertainment. Its flagship product is AutoCAD.
Nemetschek (Ticker – NEM.DE): Nemetschek SE provides software solutions for architecture, engineering, construction, media, and entertainment markets in Germany, rest of Europe, the Americas, the Asia Pacific, and internationally. It operates through four segments: Design, Build, Manage, and Media.
Dassault Systemes (Ticker – DSY.PA): Software Corporation which develops software for 3D product design, simulation, manufacturing and other 3D related products.
Procore Technologies (Ticker - PCOR): Procore Technologies, Inc. engages in the provision of a cloud-based construction management platform and related software products in the United States and internationally. The company’s platform enables owners, general and specialty contractors, architects, and engineers to collaborate on construction projects.
Trimble Inc. (Ticker – TRMB): Trimble Inc. provides technology solutions that enable professionals and field mobile workers to enhance or transform their work processes worldwide.
PTC Inc. (Ticker - PTC): PTC is a global software company that provides a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced. Its software portfolio includes offerings such as computer-aided design (CAD) solutions and product lifecycle management (PLM) portfolio solutions.
Bentley Systems (Ticker – BSY): Bentley Systems, Incorporated, provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.
Source: Koyfin, StockOpine analysis, Data as of 12 April 2024
2. Market size and forecasts
According to Cambashi, a market research and intelligence platform referenced by both Autodesk and Nemetschek in their estimates, Building Information Modelling (“BIM”) market software market is forecasted to reach $30.7B by 2027, up from ~$17.8B, representing a Compound Annual Growth Rate (“CAGR”) of 11.5% for the period 2022-2027.
Meanwhile Custom Market Insights, projects a (“CAGR”) of approximately 9.7% for Architecture, Engineering, and Construction (AEC) Software Market over 2023 to 2032, driven by the increasing demand for efficient and collaborative software solutions in the AEC industry. The market size is estimated at $9.17 billion and is expected to reach $21.9 billion by 2032.
In addition to construction software, another relevant market for Autodesk is manufacturing software, encompassing Computer-Aided Design (CAD), Computer-Aided Engineering (CAE), Computer-Aided Manufacturing (CAM), Manufacturing Operations Management (MOM), and Product Lifecycle Management (PLM). Cambashi estimates that this sector will reach $28.1 billion in 2024, marking a 9.3% increase from $25.7 billion in 2023. Key players in the manufacturing segment include Autodesk, Dassault, PTC, and Siemens.
These forecasts indicate that despite the market's size, growth remains robust, and with even slight gains in market share, industry leaders can sustain double-digit growth rates in the coming years.
Industry tailwinds
The Infrastructure Investment and Jobs Act of 2021 allocates $1.2 trillion for transportation and infrastructure spending. Additionally, the Inflation Reduction Act, amounting to $780 billion, offers tax cuts and investment incentives for companies shifting towards Electric Vehicle and battery production in the US, while the US and EU Chips Act, totaling $280 billion and €43 billion, respectively, provide further support. These initiatives/directives are set to benefit the software industry.
Moreover, gen AI and machine learning (ML) are expected to positively impact these companies in the long run. By enhancing labor productivity, optimizing design efficiencies, and addressing constraints—whether regulatory or customer-driven—these technologies are poised to drive further advancements in the industry.
3. Key metrics
Revenue Growth
Procore stands out as the undisputed leader in growth rates, significantly expanding its revenues from $289 million in 2019 to $950 million in FY23. PTC follows behind Procore, albeit with some volatility. Autodesk ranks third, demonstrating a smoother and upward trend in recent periods, particularly following its transition to annual billings.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)
Profitability
Procore was omitted from this chart due to its negative profitability, which skewed the data. Despite PTC closely trailing and leading in recent quarters, Nemetschek is ranked as the leader. With Nemetschek's transition to a subscription business model and its higher media mix (looking at Adobe one can understand the difference in margins – average at 36% over the last 5 years), we anticipate its continued leadership. Dassault exhibits strong and stable margins, while Autodesk's upward trajectory is also noteworthy.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)
Asset Turnover
Nemetschek leads the pack, by better leveraging its assets to generate sales, closely trailed by Autodesk. The two exhibit stability in their performance. While Trimble and Procore share a similar ranking due to Trimble's consistency and Procore's strong position despite the rapid growth levels, we place Procore in the third spot.
Bentley Systems' trajectory illustrates the impact of overpriced acquisitions on returns on capital and efficiency. Recent acquisitions, such as Seequent in June 2021 for $883 million (+ shares) and Power Line Systems in January 2022 for $696 million, have increased its debt and capital without a proportional impact on profits.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)
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Returns on Capital
When considering Returns on Capital, both Nemetschek and Autodesk are equally attractive, yet Autodesk holds the top position. While we don't anticipate significant shifts between the two, occasional changes in position may occur. Ranking third is PTC, which, despite ceding ground to Dassault in the last quarter, has demonstrated greater stability over recent years. This metric stands out as one of our favorites, incorporating profitability, asset efficiency, and capital allocation prowess. Given that Nemetschek and Autodesk boast returns at least double those of their peers, we've chosen to double the scoring below.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)
Debt to Equity
Debt to Equity is a crucial metric for investors, providing insight into a company's risk of bankruptcy (though it should never be used in isolation). From the chart below, Procore is the leader, closely trailed by Nemetschek. None of the companies shows weakness, as all ratios appear healthy, with those displaying higher leverage showing a downward trend over time.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)
Valuation
Procore was excluded from the chart due to its next twelve months (“NTM”) EV/EBITDA ratio of 75x, which would have distorted chart’s clarity. From our perspective, Autodesk, with a ratio of 22.4x, offers the most attractive valuation compared to its 5-year average and the multiples of its peers, where Bentley and Nemetschek appear relatively pricey. While we rank the companies based on their current ratio versus their 5-year average and their peers, it's essential to recognize that this ratio should never be evaluated against peers without considering factors such as moat, financial health, and earnings quality. Here, we focus solely on the numerical comparison as we provide a total score below.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers), Note: The data was extracted on 12th April 2024
Estimated EPS growth
Finally, we examine analysts' EPS growth expectations over the next 5 years. Procore was excluded as there are only 3-year estimates available from analysts, but with estimates of 128%, 42%, and 52% for the next 3 years, it is the clear number 1. PTC and Nemetschek secure the 2nd and 3rd positions with growth rates of 17.5% and 17.1%, respectively, followed by Autodesk at 14.9%. Please note that we only considered the latest available estimate.
Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)
4. Total score & Conclusion
Note: In each category, we assign 3 points to the top-ranked company, 2 points to the second, 1 point to the third, and 0.5 points to the fourth. Equal weighting is applied across all categories to mitigate personal biases, except for Returns on Capital, which we consider one of the most critical ratios in assessing a company. Therefore, we've doubled the score for this metric.
Based on our analysis, Autodesk and Nemetschek are the most compelling companies. If you're interested in learning more about Nemetschek, you can refer to the article we published in October 2023 (Nemetschek's Transition to a Subscription-Based Model). As for Autodesk, we have an article from May 2022 (Autodesk Deep Dive), although it's somewhat outdated and in a different format from our current reports. Procore is also noteworthy, but we don’t really like companies with operating losses.
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Great article initiative!
Thoughts on ADSK recent news about an internal investigation? Does it changes the thesis? The price is attractive IMO after the sell off following the news. Would like to add but I need to understand what's happening first.