After a 76% rally since March 23, PTC Inc. stock (NASDAQ: PTC) looks fully valued based on its historic Price to Sales (P/S) multiples. PTC Inc., a U.S-based software and services company, has seen its stock rally from $49 to $86 off the recent bottom compared to the S&P which moved around 50%. The stock is leading the overall markets by a wide margin as investors are overall positive about the software industry due to no direct Covid-19 impact. Notably, the software stocks have seen some negative movement since September 2nd due to a bout of profit-taking after a strong run – PTC’s stock is down 12%. However, the stock is still up 26% from levels seen at the end of September 2019 (FY Oct – Sept).
PTC Inc.’s stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenue growth will likely be lower this year than last year.
The company’s revenues rose by roughly 8% from FY 2017 to FY 2019. However, its net income figure decreased from $6.24 million in 2017 to -$27.5 million in 2019. The drop in net income was mainly driven by a higher income tax provision in FY 2019 due to deferred tax liabilities.
The company has seen slow revenue growth over recent years, with its P/S multiple not witnessing a significant increase. We believe the stock is unlikely to see any significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 53% Change in PTC Inc. Stock between 2017 and now? has the underlying numbers.
PTC Inc.’s P/S multiple hovered around 6x in FY 2017 and 2019. While the company’s P/S is around 8x now, there is a downside risk when the current P/S is compared to levels seen in the past years – P/S of around 6x at the end of FY 2019 and 2017.
So what’s the likely trigger and timing for the downside?
PTC Inc. is a U.S-based software company that provides solutions in the area of computer-aided design, product lifecycle management, and service lifecycle management. It serves various industries such as industrial machinery & components, aerospace & defense, life sciences, automotive, consumer packaged goods, etc. Due to the Covid-19 crisis and a resulting economic slowdown, manufacturers across industries have suffered losses partly due to lockdown restrictions and partly due to lower demand. This is likely to result in a lower number of new deals as customers are delaying spending due to the macroeconomic uncertainty. Further, this could have a negative impact on the subscription renewal rates as well. While PTC’s revenues in the current financial year are somewhat protected due to its recurring revenue model, lower new business, and a drop in renewal rates could harm its future revenue cycles. The same was evident in its Q3 results with a 19% y-o-y increase in total revenues and a 20% decline in new license sales. We believe PTC Inc.’s Q4 results in October are likely to see a drop in its revenues’ growth rate.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.
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