Does this premier simulation stock belong to your portfolio?

IInvestors in high-tech sectors often look for stocks that will expose their portfolios to fast-growing markets such as robotics, semiconductors, 5G and space exploration. One company that helps power all of these industries is Ansys (NASDAQ: ANSS), a manufacturer of simulation software. Ansys is the largest engineering simulation company in the world and has generated returns of almost 12,000% for its shareholders since its IPO in 1996.

Let’s take a look at why this business is so special and see if you should add it to your portfolio today.

What is Ansys?

Founded over 50 years ago, Ansys provides software simulation tools for engineering departments, both academic and business. Its offerings include tools to simulate designs in a range of engineering niches, from mechanics to fluids and electrical. Its customers come from the automotive, semiconductor, space and robotics sectors, among others. Its software is even used by top Formula One the Red Bull team to simulate and improve the performance of its racing cars.

Image source: Getty Images.

Research and development departments around the world allow Ansys software to test their designs before creating real-world products, saving them time and money. And Ansys reinvests nearly 20% of its turnover each year in its own R&D projects, further increasing the value of its software for its customers.

After decades of improvements, Ansys tools are light years ahead of the competition. This is one of the reasons he is able to charge a pretty penny to access his products – customer sources say the price of a single license can cost anywhere from a few thousand dollars to $ 50,000 ( depending on the product). The combination of its pricing power and expanding end markets has enabled Ansys to grow its finances steadily over the years.

Strong growth, stable customer base

Ansys has steadily increased its income over the past decades. In the first quarter, its revenue reached $ 362.2 million, up 19% year-over-year. Revenue has grown steadily since its IPO, from less than $ 50 million in 1996 to $ 1.74 billion in the past 12 months. Ansys is also very profitable and has a long history of $ 538 million in free cash flow over the past 12 months.

ANSS Revenue Graph (TTM)

Data by YCharts.

This steady growth is due in part to the company’s reliable customer base. R&D departments spend thousands – sometimes tens of thousands – of hours working on complex engineering problems using its software, and it would be expensive and time-consuming to switch to a competing tool. With the high switching costs, many of its customers are signing long-term contracts, which gives Ansys a large backlog of deferred revenue. At the end of the first quarter, that number stood at $ 936.5 million.

It trades at a high premium

Given that Ansys has been a leader in its niche and has been for some time, it’s no surprise that its stocks are trading at an expensive valuation. With a market capitalization of around $ 30 billion, its price-to-sales ratio (P / S) is 17.3 and its price / free cash flow ratio (P / FCF) is 55.8. Both of these numbers are well above average, even among its software and technology peers.

Ansys has a high free cash flow margin of 31%, which it will likely struggle to develop, especially if management remains committed to devoting around 20% of its revenue to R&D each year. This isn’t necessarily bad for the company (it’s actually quite impressive that Ansys can have such a strong free cash flow margin while spending so much on R&D), but it shows the limits of the increase. free cash flow only by increasing profit margins.

So is that part of your portfolio?

Its technological advantages and high switching costs give Ansys a wide gap. This combination has helped it consistently produce above-market returns over the years, and it should maintain its sustainable profit margins. But because the stock is trading at such a valuation, it remains on my watch list for now. There is no reason to sell stocks you already own, but at the moment there is better opportunities out there for investors.

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Brett schafer has no position in any of the stocks mentioned. The Motley Fool recommends ANSYS. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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About Robert Valdivia

Robert Valdivia

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