- Aspen Technology, Inc. is a proven winner, but remains somewhat of a relative unknown among investors.
- Aspen Technology provides software that helps resource companies design capital, operations and maintenance programs.
- Aspen Technology has several age-old trends in its favour.
- This stock is a growth stock that investors should become familiar with.
Like the mountains of Aspen, Colorado, Aspen Technology, Inc. (NASDAQ: AZPN) shows serious elevation.
The large-cap software company continues to climb to new all-time highs, leaving its struggling peers at the bottom. It is up 63% since the start of the year and it is certain that it will finish higher for the eighth consecutive year. Over the past 10 years, he has steadily climbed to a 10-bagger.
And yet, it remains somewhat of a relative unknown among investors.
How could a proven winner fly under the radar for so long? For one, it operates in a corner of the software industry that we just don’t hear much about. Second, it doesn’t fit the mold of a headline-grabbing tech company.
Let’s learn more about this high-altitude business, why it’s performing better, and where it could go from here.
What does Aspen technology do?
Based in Massachusetts (not the Rockies), Aspen Technology provides software that helps resource companies design equipment, operations and maintenance programs. Its customers, who are primarily in the energy and materials industries, derive improved profitability and sustainability from Aspen’s asset optimization solutions. Oil refiners and manufacturers are among its most common customers.
The company’s flagship offering is aspenONE, a trio of suites that support asset performance management (APM), real-time decision making, predict equipment failures, and forecast potential actions and solutions. At their core, they drive the efficiency and productivity gains that are so essential to modern manufacturing.
From an investment perspective, the main attraction here is that aspenONE is subscription-based software that generates predictable, recurring revenue. Licensing revenue represents approximately two-thirds of overall revenue and is supplemented by revenue from ongoing support, training, and other professional services.
What are Aspen Technology’s growth drivers?
Adoption of Aspen software accelerated during the economic recovery. In its recently completed fiscal year (12 months ended June 30, 2022), the company posted 40% profit growth, double the revenue growth. Talk about productivity!
And while most software players saw a slowdown in demand in the second quarter, Aspen saw an upward trend. The company’s key “annual spend” metric rose 8.5% year-on-year and 2.8% sequentially, a sign of strength in end-market demand.
In addition to the impressive organic growth, Aspen Technology’s aggressive mergers and acquisitions strategy allows it to perform well over the long term. It is in the process of integrating the Geological Simulation Software (GSS) and OSI Inc. businesses acquired from Emerson. These should expand its presence in the utility sector and create cross-selling opportunities for existing energy-related customers.
This summer, Aspen Technology signed a $623 million cash deal to buy Micromine, an Australian maker of next-generation technologies for the mining industry. The move was designed to not only help the company strengthen its competitiveness Down Under, but also strengthen its portfolio through the addition of end-to-end mining software. Given that the Australian mining space represents an estimated half-trillion dollar market, it could prove to be a lucrative acquisition.
Aspen Technology has several age-old trends in its favour. Adoption of performance-enhancing cloud-based software, big data analytics, and the Internet of Things are all long-term growth drivers. While global software spending has slowed recently due to macroeconomic concerns, these growth themes are here to stay – and should sustain demand for Aspen’s evolving product suite for years to come.
Is it too late to invest in Aspen technology?
Despite the incredible run, Aspen Technology seems to have more growth ahead. For fiscal 2023, management expects mid-term annual contract value (ACV) growth of 12%. ACV refers to the annualized value of the company’s licensing, maintenance, and support contracts. This means that he expects new customers to join us and existing customers to expand their contractual services.
The consensus forecast for FY2023 earnings results in a forward P/E ratio of 37x. It may seem expensive, but given the industry-beating growth profile and long-term growth catalysts, premium valuation may be money well spent.
That said, shares of Aspen Technology are trading within 5% of their all-time high and near the upper end of their trading range. Waiting for a 10% pullback to around $225 may present a more cautious entry point for long-term investors.
Aspen Technology is expected to report its first quarter fiscal 2023 results after the Oct. 26 close. Wall Street is forecasting another stellar performance highlighted by 62% year-over-year earnings growth (which would be an acceleration from 59% last quarter). The stock may again be an attractive earnings play, but more importantly, it is growth investors should become familiar with.
Before you consider Aspen technology, you’ll want to hear this.
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