As technology has become increasingly potent and complex, manufacturing the chips and software to power it has become much more challenging. For that reason, the companies that have found a niche in semiconductor or software development have become highly popular with growth investors.
ANSYS, Inc. (NYSE: ANSS) is one of those few players that makes both semiconductors and specialized software. Those familiar with the company usually associate ANSYS with its engineering simulation software. But the company’s cutting-edge software, like the company itself, can do so much more than that.
Its software is being adopted in industries from healthcare to energy to defense, both stateside and abroad. But ANSYS stock hasn’t performed to its potential following a downdraft in 2022 alongside most other technology stocks.
After trading above $400 in late 2021, ANSS is currently priced at around $270. Year-to-date, it’s up about 13.46%, so is ANSYS stock undervalued?
What Makes Ansys Special?
The goal of ANSYS software is to give designers a real-world simulation of their models. For example, an engineer could test for design flaws in their new EV model without having to build expensive prototypes and spend countless hours testing them.
That saves time and money and reduces risks from physical testing of early models. But while engineering has been the primary market for ANSYS software so far, many industries can benefit from accurate simulation technology.
The announcement that ANSYS software was being used to develop a cancer treatment raised eyebrows in the healthcare community. Also, Airbus recently announced that ANSYS software is being used to develop unmanned aircraft that will play a big part in future defense operations.
ANSYS has also cultivated partnerships with academic institutions for the research and development of its applications. The company donated over $50 million in funding for the recently opened ANSYS Hall at Carnegie Mellon University.
These long-term academic partnerships drive innovation for the company, but they also ensure that graduating professionals are intimately acquainted with ANSYS software before they reach the workforce.
Ansys Analyst Ratings
Analysts are mostly bullish on ANSS with only one Sell rating among the 18 analysts covering the stock. Even the lowest forecast has the stock increasing by 10.8% to $300 over the next 12 months.
Nine analysts rate ANSS as a Hold at this juncture, with the median forecast projecting that the stock will increase by around 20% over the coming year to $326.70.
There are 8 Buy ratings at this price point, with one of those analysts predicting ANSS will outperform the market.
The highest rating has the stock returning to $400 over the next year, a 47.7% gain from where it currently sits.
Is Ansys Stock Undervalued?
Ansys is 18.2% undervalued based on the consensus price target of $329.69 among 17 analysts.
There were a number of positives in the company’s 2nd quarter of 2023 earnings report, but perhaps the most important takeaway is that ANSYS beat analysts’ estimates across the board. The company reported a 5% year-over-year increase in total revenue, which eclipsed consensus estimates by 1.33%
Even though net income dropped by 30% year-over-year in the quarter, from $98.8 million to $69.5 million, it was still in line with expectations. Diluted earnings per share of $0.80 was over 5% higher than forecasted.
That good news hasn’t translated into gains as ANSYS shares have declined over the past month. That’s perhaps attributable to the high P/E ratio of 45.16, which is elevated even for the tech industry that sees many companies trade with P/E values above 30x.
While the valuation may not look appetizing, the future of ANSS is dependent on the company’s growth prospects, which forecast steadily growing EPS over the next few years.
The high P/E value might cause some investors to believe that ANSYS is overvalued at the current price. But it’s still worth it to note that ANSYS competitors Synopsys and Cadence have P/E values above 65 at the moment.
Ansys Revenues Are Increasingly Protected
Though ANSYS is based in Canonsburg, PA and it has been doing business in the US since 1970, a large chunk of the company’s revenue streams come from overseas.
In the company’s 2022 annual report, 60% of ANSYS revenue came from international operations. That diversification in operations not only provides new avenues for growth, but protects the company when slowdowns hit.
Another major factor impacting the company’s future is its gradual shift to a subscription-based model. Subscriptions help ANSYS create more predictable revenue streams, and they also allow for easier upselling to existing customers.
Subscription revenue accounted for 75% of total revenue last year, and as that number increases the more ANSYS is protected against sales volatility. Because of this stability and the company’s groundbreaking products, the future looks bright for ANSYS.
Given continued sales growth, the analysts’ consensus of almost 20% increase over the next year certainly seems possible.
Is Ansys Stock a Buy?
No doubt, ANSS share price has floundered of late, with the stock down nearly 14% over the past 6 months. The impact of 2022’s chip slowdown is still affecting the company, and there doesn’t seem to be an immediate end in sight.
However, most analysts believe that the demand for the company’s products will pick back up over the coming year. ANSYS can leverage its position in multiple industries, cultivate new relationships with academic partners, and expand internationally, and those are all good reasons to be bullish about the company.
The continued focus on subscription-based products will also help the company to keep its customers invested. While the high P/E ratio means the stock is not particularly undervalued, the industry is hot enough and the stock is still low enough to keep ANSYS shares on most growth investors’ watchlists.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.