Infrastructure Cloud And Digital Twin Will Secure A Resilient Future

Key Takeaways

• Bentley Systems' strategic acquisitions and shift toward infrastructure sectors enhance future revenue growth and reduce earnings volatility through improved ARR resilience.
  
• Expansion of digital twin technologies and diversified geographic presence drive growth, enhance net margins, and ensure predictable revenue through structured pricing models.
  
• Bentley Systems faces risks from exposure to cyclical sectors, government funding dependence, geopolitical tensions, and execution risks in its asset analytics growth strategy.

Catalysts

Provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.

• Bentley Systems has proactively shifted its focus from commercial facilities and industrial sectors, which are more cyclical, to robust infrastructure sectors, improving the resilience of their Annual Recurring Revenue (ARR). This shift is likely to positively impact revenue and reduce earnings volatility.
  
• Strategic acquisitions like Seequent and Power Line Systems have positioned Bentley as a key player in burgeoning sectors like subsurface environmental modeling and electrical grid infrastructure, which are expected to experience increased demand due to global supply chain needs and energy transitions, thus enhancing future revenue growth.
  
• The expansion of Bentley's Infrastructure Cloud, powered by iTwin and Cesium, is anticipated to drive growth in life cycle information management offerings. As digital twin technologies become more prevalent, Bentley's offerings will likely increase in value, potentially boosting net margins and earnings.
  
• The growing E365 enterprise subscription model has introduced structured and scalable pricing strategies with negotiated floors and ceilings, ensuring predictable ARR growth and enhancing profit margins through better revenue visibility and more effective cost controls.
  
• Bentley's geographic diversification and strategic reduction of exposure to volatile markets, such as China, have increased stability and predictability in revenue streams. This diversification, alongside improved operating margins in new markets, supports sustained free cash flow growth.

Bentley Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bentley Systems's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.4% today to 25.0% in 3 years time.
• Analysts expect earnings to reach $442.6 million (and earnings per share of $1.37) by about May 2028, up from $234.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.5x on those 2028 earnings, down from 58.8x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Bentley Systems Future Earnings Per Share Growth

Risks

• Bentley Systems has a significant exposure to cyclical sectors such as commercial facilities and industrial, which are subject to demand and interest rate fluctuations. This exposure could affect its revenue and earnings negatively if these sectors face downturns.
  
• The ongoing economic and geopolitical headwinds, particularly harsh in regions like China, which represents less than 2.5% of total ARR, could dampen growth and impact revenue sustainability, especially if tensions escalate, leading to market instability.
  
• Despite optimism regarding public infrastructure funding, Bentley's dependence on federal funding in the U.S. implies vulnerability to changes in government priorities or cutbacks in infrastructure spending, which could directly affect their revenue and cash flow.
  
• While Bentley’s resilience against market conditions seems strong, the professional services segment has been noted as volatile, generating low margins, and is subject to decline. A further downturn in this area could negatively impact overall net margins.
  
• Bentley's asset analytics business represents a growth opportunity, but it's still contingent on further acquisitions and successful integration of new technologies like AI. Execution risks and delayed growth in this segment could impact future earnings growth potential.

Valuation

• The analysts have a consensus price target of $50.258 for Bentley Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $61.0, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $442.6 million, and it would be trading on a PE ratio of 44.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $43.77, the analyst price target of $50.26 is 12.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.