Imagine the characteristics of the perfect stock, what would they be? A perpetually growing top line would seem to check the box. So too, a company that hasn’t reported operating income in the black for a decade. That kind of enterprise would seem like a holy grail, but it does in fact exist, and it’s French.
Dassault Systèmes (OTCMKTS:DASTY) is a remarkable European company that specializes in software for 3D product design and simulations. Over the past ten years, management has reported year-over-year growth in every single quarter and, better yet, operating income has climbed from $692.4 million to $1.284 billion over that same period.
It’s had a stunning track record over the past decade with DASTY share price climbing by 307.69%, but will it keep on bulldozing higher or is it finally ready to tip over?
What Makes Dassault Systèmes So Special?
At first glance, Dassault is simply a 3D simulation provider but what is less-well understood is the breadth and variety of industries served. From aerospace to automotive, Dassault has established a strong presence, yet over time, it has expanded to far away fields from its original core competence, including life sciences, consumer goods, and even fashion.
One of the reasons the company has managed to sustain such steady growth is its wide industry diversification mitigates against sector-specific risk.
To further expand its market reach, Dassault Systèmes management has been acquisitive, snapping up Medidata Solutions in 2019, for example, in order to deepen its reach within the healthcare sector. Beyond the obvious revenue growth that comes from the purchase, Dassault also opens the door to further collaboration opportunities.
The agility and flexibility of its products to span so many sectors is another core strength of the firm. For example, its 3DEXPERIENCE platform is capable of modeling sustainable cities and environments across the globe. And speaking of international reach, Dassault has customers not only in Europe where it’s headquartered but also in North America and Asia among other regions.
It’s clear that the company enjoys some notable advantages but is it worth buying?
Why Buy Dassault Systèmes?
The headline revenue figures are the first signal that Dassault is worth paying close attention to because, on a twelve month rolling basis, they have grown from $2.84 billion in 2013 to $6.22 billion in the interim. Last quarter alone, management reported top line of $1.5 billion.
Now here’s where the Dassault story gets really interesting. The gross margin last quarter was a stunning 83.3%. Remarkably, that is a decline from a decade ago when it sat at 87.7%. In the intervening period, Dassault did not report a single quarter with gross margins below 80%.
By controlling its cost of revenues so well, Dassault has ample dry powder to spend on operating costs, including SG&A, R&D and General & Administrative, but all those combined don’t eat into the top line sufficiently to hurt profitability. Far from it, operating income has been positive every single quarter for a decade. So too, EPS has been in the black every quarter.
You might wonder if there is a fly in the ointment somewhere? Maybe the balance sheet hides some massive debt burden that is waiting to spook investors? No, that’s not the case at all with cash levels sitting at $3.56 billion last quarter versus $2.1 billion in long-term debt.
Maybe the cash flow is negative? Again, no surprises there. To the contrary, levered free cash flows have been positive in each quarter over the past ten years too.
With so much going for it, the question arises whether now is the time to buy Dassault stock?
Is Dassault Systèmes Stock Undervalued?
No doubt, Dassault is a company with pristine earnings quality and a consistently increasing EPS. Historically, DASTY share price does not display levels of price volatility that would trouble even the more conservative-leaning investors. And it’s got a 27-year track record of maintaining dividend payments, albeit the yield is a modest 0.4%.
So, with all that said, is Dassault Systèmes stock undervalued? According to 3 analysts covering Dassault, the stock has just 2.2% upside to fair value of $44.10 per share.
To explore whether that is a reasonable price target, we turned our attention to a discounted cash flow forecast analysis that suggested intrinsic value of $42.92 per share was reasonable.
Dassault’s price-to-earnings ratio is 51.3x at this time while its price-to-sales over the past twelve months is 9.1x.
When you combine analysts price targets with a DCF and standard multiples, it’s clear that Dassault is no screaming buy at this time, but rather it’s quite fairly valued.
Indeed, even a technical analysis at this time suggests it’s somewhat overbought. So, what’s the best way to play DASTY stock?
Dassault Systèmes is among the most prolific revenue-generating firms in the market, predictably reporting year-over-year increases in its top line for over a decade straight with no broken streaks.
It’s also executed well, delivering earnings per share in the black each quarter over the same period of time.
As the company’s operations and revenues have scaled, so too has its share price risen by over 4x, handsomely rewarding shareholders.
For those considering an investment now, the valuation is a drawback. In addition to a DCF forecast suggesting DASTY share price is modestly overvalued, the company’s PEG is north of 2.0, which is a further valuation flag.
Analysts see marginal upside at this time and the technical snapshot suggests the share price is somewhat overbought at this time.
Make no mistake about it, though, this is a company to add to your shortlist on a pullback when the margin of safety is greater.
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.