This Obscure Software Company’s Addressable Market Will Triple in the Next Decade

Innovation and new products drive sales for nearly every company. Customers are often lost when disruptors arrive with offerings greater than their competitors. Because R&D is such a vital component to engineering new solutions, creating new offerings, and remaining on the cutting-edge, investing in companies that operate in this space can be lucrative.

In order to reduce prototyping costs, many engineers simulate a product to gain insight into how it will perform without physically building it. ANSYS (NASDAQ: ANSS) is the global leader for advanced engineering simulation software.

An Expanding Market

When envisioning the future, it’s clear that technologies like 5G, electric vehicles, and autonomous driving will have an enormous presence. ANSYS serves all of these markets and provides powerful simulations for how these products behave in real life.

In 5G, ANSYS can help simulate semiconductors and electronic integration. It also can simulate how a 5G signal will be transmitted through different environments —like a city, for example .

For autonomous driving, ANSYS can create a lifelike environment and predict how LiDAR, cameras, or speed sensors will perform . Numerous opportunities exist to utilize ANSYS’s software when designing various components of electric vehicles, such as battery thermal performance, the propulsion system, or the many chips that go into the automobile.

ANSYS wasted no time creating products that fulfill the needs of engineers as new technologies arise. With new, more complex ideas materializing in the form of new technologies and products, ANSYS predicts the total addressable market (TAM) for simulation software will triple from $6.6 billion to around $17 billion by 2026.

Where Does ANSYS Operate?

ANSYS has customers in nearly every industry. With simulation software in structures, fluids, semiconductors, optics, and other categories, most companies will have a use case for at least one of the many offerings. Airbus, Volvo, Samsung, Pfizer, and several other notable companies use ANSYS’s products and have hardly any business overlap with one another. Because of this diversity in their clientele, an economic downturn in one industry would not spell disaster for ANSYS.

Additionally, ANSYS has several partners including Autodesk (NASDAQ: ADSK) and Synopsys (NASDAQ: SNPS). Together with its many affiliates, ANSYS offers plug-in solutions that allow users of other software providers to integrate seamlessly with its own product. For example, Synopsys, whose IC Compiler II software designs integrated circuits , uses ANSYS’s RedHawk to calculate voltage drop off and electromigration . Due to the deep relationships and complexity of the product, ANSYS holds a true competitive advantage that few companies enjoy.

Image source: Getty Images.

Consistency Throughout Time

Undoubtedly, ANSYS has a huge market opportunity in front of it. In order for an investment to make sense, the business that provides these solutions must be sound, and ANSYS certainly is.

It has consistently turned a profit for the last 15 years. Over that same time frame, its gross profit margin never dipped below 84%. Even during the financial crisis of 2008 and 2009, ANSYS grew both its net income and revenue. This resiliency and consistency during difficult times is one indication that ANSYS could be a smart investment no matter the market conditions.

Simulation Focused

The competition within the engineering simulation market is extremely fragmented. Companies like Dassault Systèmes (OTC: DASTY) compete with ANSYS in structures and electronics but lack other products. Most competitors have offerings for one or two segments, but nothing like the breadth of products of ANSYS. ANSYS is solely focused on simulations, giving it a single area of the market to focus on.

ANSYS has been known to snatch up smaller competitors that offer quality products. For example, Phoenix Integration was recently acquired which will allow ANSYS to better track the changes made on a product by different engineering teams .

Present Success

The metric that management promotes as a key metric is annual contract value, which is a non-GAAP proprietary measure for a better indication of growth rather than revenue. It includes maintenance and license agreements, among other items. This number increased 25% in the last quarter and is projected to be in the lower teens for the entire fiscal year, although management has a track record of beating expectations. While this does not represent crazy growth, it does indicate restraint from management to not grow too quickly and perhaps over-expand.

Currently, ANSYS sits around 10% below its all-time high, a nice discount for a company that operates in rapidly expanding markets. As long as there is technological innovation, ANSYS will be there to assist engineers in a critical phase of developing new products.

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Keithen Drury owns shares of ANSYS, Inc. The Motley Fool owns shares of and recommends Autodesk and Synopsys. The Motley Fool recommends ANSYS and Dassault Systemes. The Motley Fool has a disclosure policy.

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