The superlative stock of software no one is talking about

Like the mountains of Aspen, Colorado, Aspen Technology, Inc. (NASDAQ:AZPN) shows some serious height.



MarketBeat.com – MarketBeat

The large-cap software company continues to climb to new record highs, leaving struggling industry peers at the bottom of the slope. It is up 63% so far and will almost certainly finish higher for the eighth year in a row. Over the past 10 years it has steadily risen to a 10 dredge.

And yet it somehow remains a relatively unknown among investors.

How could a proven winner stay under the radar for so long? First, it operates in a corner of the software industry that we just don’t hear much about. Two, it doesn’t fit the model of a flashy tech company making headlines.

Let’s learn more about this high-altitude company, why it is perform better than and where it could go from here.

What Does Aspen Technology Do?

Based in Massachusetts (and not in the Rocky Mountains), Aspen Technology offers software that helps resource-related companies design equipment, operations and maintenance programs. Its customers, who are mainly in the energy and materials sectors, get improved profitability and sustainability from Aspen’s asset optimization solutions. Oil refineries and manufacturers are among the most common customers.

The company’s flagship product is aspenONE, a trio of suites that support asset performance management (APM), real-time decision making, predicting equipment failures, and predicting potential actions and solutions. At their core, they promote the efficiency and productivity gains that are so essential to the modern manufacturing industry.

From an investment perspective, the main attraction here is that aspenONE is subscription-based software that generates predictable, recurring revenue. License revenue accounts for approximately two-thirds of total revenue and is supplemented by revenue from ongoing support, training and other professional services.

What are Aspen Technology’s growth engines?

The introduction of Aspen software is gaining momentum during the economic recovery. In its recently completed fiscal year (12 months ended June 30, 2022), the company posted 40% earnings growth, twice the revenue growth. Talk about productivity!

And while most software players have a demand delay in the second quarter, Aspen showed a higher trend. The company’s key “annual spend” metric grew 8.5% year-on-year and 2.8% sequentially, a sign of strength in end-market demand.

In addition to impressive organic growth, Aspen Technology’s aggressive M&A strategy ensures it will perform well over the long term. It is in the process of integrating the Geological Simulation Software (GSS) and OSI Inc. business it acquired from Emerson. These are expected to expand its presence in the utility sector and create cross-sell opportunities for current power-related customers.

This summer, Aspen Technology signed a $623 million all-cash deal to buy Micromine, an Australian maker of next-gen mining technologies. The move was intended to help the company not only boost its competitiveness Down Under, but also bolster its portfolio through the addition of end-to-end mining software. Given that the Australian mining sector is an estimated half-trillion dollar market, it could prove to be a lucrative takeaway.

Aspen Technology has several secular trends in its favour. The adoption of performance enhancing cloud-based software, big data analytics and Internet-of-Things are all long-term growth engines. While global software spending has slowed recently due to macroeconomic concerns, these growth themes are here to stay – and Aspen’s evolving product suite should remain in demand for years to come.

Is it too late to invest in Aspen technology?

Despite the great run, Aspen Technology seems to be growing even more. For fiscal 2023, management expects a 12% growth in the annual contract value (ACV) in the middle. ACV refers to the annual value of the company’s license, maintenance, and support agreements. This means it expects new customers to come on board and existing customers to expand their contracted services.

The consensus forecast for fiscal 2023 earnings translates to a future P/E ratio of 37x. This may seem expensive, but given the growth profile above the sector and the long-term growth catalysts, the premium valuation could be money well spent.

That said, Aspen Technology stocks are trading within 5% of their all-time high and near the top of their trading range. Waiting for a 10% drop to about $225 may be a more cautious entry point for long-term investors.

Aspen Technology is expected to report Q1 2023 results after the close on October 26. Wall Street is forecasting another excellent performance with year-over-year earnings growth of 62% (which would be an acceleration from 59%). The stock may once again be an attractive profit game, but more importantly, it is a growth that investors should get to know.