Investing in IoT and Augmented Reality with PTC Inc.
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When evaluating the merits of tech stocks, we like to focus on the exposure investors receive to any particular theme. This is often measured by revenues that can be attributed to the theme as a percentage of total revenues. For example, we looked at how Teradyne has been slowly expanding into industrial robotics. Over time, it’s expected that a fast-growing segment like robotics becomes a meaningful part of the company’s total revenues. However, concentrated revenue streams are more prone to volatility. Think about a company like Nvidia which sells – among other things – hardware for bitcoin mining. When the cryptocurrency music suddenly stopped, Nvidia was able to offset the impact because they have a diversified set of business segments.
Many dividend growth companies are able to consistently grow their dividends in the double digits because they manage a portfolio of businesses which are aggregated into segments. Investors can then assess segment-level performance and monitor the company’s success across both functional and geographic segments. Medical device company Stryker is a good example of a company that’s able to consistently grow their dividend by managing a high-growth collection of businesses. Today, we’re going to look at a company that’s building a diversified set of businesses across the Internet of Things (IoT), Computer Aided Design (CAD), and Augmented Reality (AR). Already getting tired of acronyms? Well, we’re not done yet. The company we’re talking about is called Parametric Technology Corporation (PTC).
PTC Inc. Stock
PTC Inc. stock was first sold to the public back in 1989 and today they’re trading on the Nasdaq Global Select Market which consists of 1,200 stocks that meet Nasdaq’s strict financial and liquidity requirements and corporate governance standards. With a market cap of just over $8.5 billion, PTC is no small company, yet their value proposition seems hazy. They seem to dabble in a bit of everything, and it’s all been force-fed into the below diagram where we’re expected to connect the dots.
It seems convoluted, but perhaps not. We talked before about how IoT sensors can be used to create “digital twins” of things as complex as entire factories. Once you’ve created your digital twin, you can then optimize it in any number of ways. The ideal configuration can then be applied to the “physical twin.” Then there’s the AR part. Apparently, the information that’s gleaned from the digital twin is then manifested in AR which helps somebody do something more effectively. It kind of makes sense.
Perhaps we might better understand the company by looking at the introduction of their products over time. Here it is in a nutshell based on information taken from the world’s largest crowdsourced data encyclopedia:
- 1988 – Released Windchill, an internet-based solution for Product Lifecycle Management (PLM).
- In the 2000s, lots of acquisitions relating to lifecycle management software and a few relating to CAD
- 2010 saw a new President and Chief Executive Officer and company rebrand to PTC Inc. – CAD software renamed to Creo
- More CAD and PLM-related acquisitions and in 2013 made the first IoT purchase – ThingWorx
- Further IoT acquisitions – IoT connectivity management provider Axeda Corporation for $170m in 2014, IoT predictive analytics company Coldlight for $105m in 2015, and industrial connectivity provider Kepware for $100m in 2016.
- Initial outside investment in AR with the acquisition of Vuforia from Qualcomm in November 2015 and then acquired Waypoint Labs in April 2018.
That’s how PTC’s product offering evolved into what it is today.
The company’s latest 10-Q talks about where it wants to be tomorrow, mainly focused on the high-growth areas of IoT and AR:
In October 2018, we initiated a restructuring plan to realign our workforce to shift investment to support Industrial Internet of Things and Augmented Reality strategic high growth opportunities. As this was a realignment of resources rather than a cost-savings initiative, it did not result in significant cost savings. The restructuring plan was completed in the first quarter of 2019.
When looking at growth opportunities, there’s a term MBAs like to use called total addressable market (TAM) which is an estimate of the total revenue opportunity for a product or service. In the below diagram we can see how high-growth areas like IoT and AR will become a large part of where PTC plans to drive revenue growth from:
Industrial IoT use cases are pretty easy to understand and we’ve covered a fair number, from the incredible growth of Samsara to 7 Industrial IoT Startups Using AI to Monitor Machines. What we’re curious about today is PTC’s augmented reality offering and how it relates to their other business segments, in particular, IoT.
IoT and Augmented Reality
Pierre Audoin Consultants (PAC), a leading independent European research and consulting firm, published a report this past July on Platforms for IoT & AR in Europe 2019 which talks about “AR platforms for connected workers.” They’re seeing an increasing number of use cases for industrial AR because the development platforms are becoming easier to use and the quality of AR hardware is rising while costs fall. “There is increasing adoption of AR in the manufacturing space to provide support in many areas, such as field services, assembly, quality control, logistics, and training,” says PAC, and it only makes sense that AR is used to visualize all that IoT big data that’s now being generated and captured. In other words, look through a set of AR glasses and you might see a “digital twin” overlaid onto whatever it is you’re looking at.
According to PAC, the leading AR platform today is PTC’s Vuforia which is the “only vendor that offers AR application development platforms for all three levels – deep code, low code, and no code.”
While the technology has reached maturity, the vendors haven’t. The PAC report says that besides PTC and Amazon, there are only “very small and very AR-focused vendors active in this space today.”
While we kind of understand how IoT and AR will fit together, it’s hard to tell where one ends and the other begins. In order to monitor the progress PTC makes across all their business segments, we can look at just one metric – “annual recurring revenues” (ARR).
Annual Recurring Revenues
PTC understands that most people will have a hard time wrapping their heads around what it is they do, especially the CFA types who fail miserably when it comes to WeWork-type vision statements. That’s why they’ve developed a simple underlying business model which focuses on ARR. We’ve talked before about how beautifully simplistic this business model is. You have X number of customers paying you a subscription fee. That represents a total amount of money you receive per year which we call ARR. That number can only change if certain events happen such as the following:
- A customer cancels their subscription (ARR falls)
- You increase prices (ARR rises)
- A new customer comes on board (ARR rises)
- You acquire someone else’s subscription product (ARR rises)
- A customer fails to renew their subscription (ARR falls)
Now you can begin to drive other meaningful metrics like number of sales calls/visits or retention rates – the percentage of customers who renew their subscriptions. Regardless of what business PTC happens to be in at any given time, we’re able to measure their success based on the growth of ARR over time. If you’re a shareholder in PTC Inc., now you have one simple metric to watch – ARR – which is a proxy for growth. And it’s growing pretty fast:
Someone else who is also watching ARR is Rockwell Automation (ROK), a $23 billion provider of industrial automation and digital transformation solutions.
Rockwell Automation and PTC Inc.
In June of last year, PTC Inc. and Rockwell Automation entered into a strategic partnership which involved Rockwell purchasing $1 billion of PTC shares with Rockwell Automation’s Chairman and CEO, Blake Moret, joining PTC’s board of directors. The announcement talked about how PTC plans to integrate their IoT and AR products into Rockwell’s industrial automation platform which allows both companies to cross-sell products across their mutual customer bases. The investment by Rockwell constitutes an approximate 8.4% ownership interest in PTC. Rockwell has some skin in the game now, and this vote of confidence bodes well for PTC shareholders since it could hint at an outright acquisition down the road once the platforms have demonstrated that they can play well together.
Conclusion
Investing in disruptive technologies can be problematic. On one hand, we can look for pure-play opportunities where we can maximize our exposure to any one technology theme. Companies like Illumina might be a good example of this where you’re putting all your eggs in one basket – genetic sequencing machines. On the other hand, we can invest in companies that have a portfolio of disruptive technologies they’re targeting. One example would be Nvidia where we’re getting exposure to multiple themes like AI chips, gaming, and blockchain. PTC is a company that has some cash cows (CAD and PLM) that can be used to support high-growth areas like IoT and AR, resulting in a product suite where each offering complements the others. Top it all off with interest from a bigger player like Rockwell Automation, and you have a very interesting stock which provides diversified exposure to multiple disruptive technology themes.
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