A buying opportunity for growth stock fans

This tech company offers great potential and could be one for patient investors to consider.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Companies usually err on the side of underplaying their short-term potential, naturally preferring to surprise shareholders with better-than-expected results. High-tech player PTC Inc (NASDAQ:PTC) has in the past built up unrealistic expectations, but management has learned its lesson and it is now possible to make a clear assessment that the company offers great potential.

PTC, based in Boston, Massachusetts, develops software and technology services that help client companies design and develop products and manage information. There is enormous scope, as the design tools can be utilised even in the conception stage of a product, before the expense of producing prototypes is incurred.

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Early testing can also save time and resources in the later stages of development, resulting in cheaper products to sell in a highly competitive world. It can also mean getting products to market faster, beating competitors on time as well as money.

PTC has been in operation since 1985, has more than 6,000 employees operating from 80 offices in 30 countries, and has been growing through acquisitions. Revenue comes mostly from North America and Europe, which account for about 85% between them.

It is, in fact, largely through those carefully chosen acquisitions that rapid expansion could come through helping industrial customers benefit from worldwide digital networks and, in particular, the internet of things.

Source: interactive investor. Past performance is not a guide to future performance

Much of PTC’s technology and support service is available on cloud computing, which should soon lead to a wider range of customers, many buying through subscription services.

Free software is made available to students, luring in future users about to enter industry and spread the message.

The most recent results, for PTC’s second quarter, were greeted with profit taking, although that was a reflection of a previous strong run in the share price rather than the figures themselves, which were quite strong.

Revenue totalled $461.8 million, a 28% rise compared with the previous second quarter, with core products and technology offering the best potential for growth faring well. Recurring revenue was 31.3% ahead, which augurs well for the future. Although the revenue figure was helped by acquisitions and the impact of including upfront licence revenue, it is encouraging to note that the top line beat expectations. Earnings per share at $1.08 were 83% ahead.

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Management continues to expect the world economy to start improving as 2021 progresses, and has slightly upgraded its forecast of revenue for the company’s full year to the end of September to $1.71-1.74 billion. Earnings per share are now projected at between $3.18 and $3.39, 14 cents higher than previous expectations, which would be about 30% better than last time.

The shares were slow to take off until five years ago, when they gained a new lease of life, and although they took a nasty knock during the market crash in early 2020, they have since recovered to hit new highs. The stock is, though, currently off its best around £133, opening up a possible buying opportunity.

There is no dividend and the price/earnings ratio is over 70, so the market is clearing banking on seriously strong expansion in the near future. If PTC fails to cash in soon the opportunity may be lost forever. However, profits have been ploughed into the business to produce a rapid rise in earnings, so the market’s faith does not look misplaced.

Much could depend on Catherine Kniker, who was promoted to executive vice-president and chief strategy officer just over a month ago. She has held numerous roles at PTC, including manager of strategic global alliances, so she knows the business well.

Hobson’s choice: Don’t bet the house on PTC, but if you like companies with prospects of strong growth and are willing to be patient it is worth considering up to the recent peak of $149.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.