Cathie Wood has shown keen interest in the positioning and workflow technology firm Trimble (TRMB 0.25%). With Trimble being the leading holding in the ARK Space Exploration & Innovation ETF and a top five holding in the ARK Autonomous Technology & Robotics ETF, it’s evident that Wood’s investment strategy revolves around disruptive technology and sustained growth opportunities. Trimble fits this profile perfectly, and recent performance underscores its potential as an attractive investment option. This article delves into the reasons behind Trimble’s compelling value proposition.
Navigating Trimble’s Disruptive Realm
For those less familiar with Trimble, here’s a concise introduction. Trimble specializes in precise positioning technology, aiding in pinpointing positions across construction sites, geospatial maps, vehicle fleets, and agricultural equipment. However, the present landscape is far from static; instead, it thrives on data generation and real-time analysis facilitated by technology like Trimble’s hardware and software. This data-driven approach enables actionable insights. Construction managers access real-time site activity data, fleet managers receive instantaneous fleet information, and farmers harness data to optimize planting, treating, and harvesting decisions. This integration into customers’ workflows renders Trimble a prime example of disruptive technology.
Revenue Growth and Margin Expansion
A compelling dimension of Trimble’s trajectory lies in its revenue composition. A trajectory inclined towards subscription and recurring services growth, as opposed to hardware and perpetual software revenue, emerges. Recent years have witnessed this transition, favorably impacting gross profit margins. Subscription and recurring revenue exhibit an impressive gross margin of approximately 80% (2022 figures), in contrast to hardware and perpetual software’s 48% (2022 figures). While Trimble’s overall revenue and EBITDA growth might appear subdued, focusing solely on these figures might raise concerns.
However, the focal metric to monitor is the annualized recurring revenue (ARR), which accurately reflects a company’s long-term cash flow potential driven by a dependable recurring revenue stream. Unlike upfront booked revenues and EBITDA, ARR provides a more comprehensive understanding of future growth. The second quarter unveiled a 14% ARR surge YoY, bolstered by the Transporeon acquisition, contributing significantly to recurring revenue.
Segment Insights and Growth Potential
An exploration of segment performance reveals varied trends. The buildings and infrastructure segment boasts a remarkable 20% organic ARR growth, buoyed by robust global infrastructure spending. Despite residential sector concerns, Trimble’s growth potential remains potent, buoyed by promising nonresidential U.S. spending in 2023. Resources and utilities experience double-digit organic ARR growth, though sentiment towards farmer spending weakens. Transportation, which undergoes mid-single-digit organic ARR growth, reveals early signs of an upturn in the spot market, hinting at a favorable outlook for freight companies.
Projections and Free Cash Flow Generation
With Trimble’s transportation and buildings and infrastructure sectors exhibiting substantial recurring revenue, robust ARR growth is foreseeable. This projection aligns with the anticipation of significant free cash flow (FCF) growth. Analysts predict $656 million FCF for 2023, translating to a favorable valuation of 20.6 times FCF—an excellent proposition for a growth-oriented stock.
In a market driven by disruptive innovation and sustained growth, Trimble emerges as a promising contender. Its alignment with Cathie Wood’s investment principles, coupled with its focus on disruptive technology and recurring revenue, substantiates its potential to flourish. As Trimble’s ARR experiences an uptick, paving the way for augmented free cash flow, it solidifies its position as an attractive investment choice in today’s dynamic market landscape.