Dassault Systems: The Return of Enterprise Tech Fears (DASTF).


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Piranha

Enterprise technology, like all other technologies, has lost money. Dassault Systemes (OTCPK:DASTY)(OTCPK:DASTF) used to lie above the rest. Its PE has been consistently high, and shareholder value creation has been very consistent and highly significant. Many years. But the market seems to have given no quarter as prices have fallen 50% from last year’s high. We believe the market is right, and Dassault Systemes should be avoided for the time being as uncertainties are still too great.

dassault price

Dassault Systemes price (seeking alpha)

A quick Q2 note

The Q2 results mirror that of other enterprise technologies, which continue to grow despite some price hikes around the world. Dassault earns about 50% of its revenue in the US, so surely the federally created environment is an appropriate analogue for its overall results.

dassault highlights

Highlights (Q2 2022 Press)

Earnings growth remained steady and relatively flat, and that was consistent with last earnings season in big tech, and the bifurcation we saw between consumer and corporate spending, while consumer confidence declined, corporate confidence did not.

EPS growth also looks strong, but the reality is that major US exposure and an unconstrained long position in the dollar were the main contributors to EPS growth. Headline figures were around 20%, constant currency figures were around 10%. While growth remains respectable, we are seeing some pressure on the contracted service revenue front due to labor inflation, consistent with other enterprise technology companies, albeit meaningfully. Software revenue exposure with Dassault.

Comments

Most of Dassault’s revenue can be attributed to software revenue, so the following end-market mix represents the company’s vulnerabilities and opportunities.

End-market

End-market segmented (Q2 2022 Press)

In our opinion, there are end-market risks here in addition to the life sciences business. Meaningful automotive risk and risk is related to other manufacturing businesses that work for consumer durables that have fallen through the cracks in the first place. This is only for industrial and creative class. On the main innovation side, you start to enter the electronics and semiconductor realm, where inventories have gone from thin to swollen, indicating another glut as 2018. Life sciences have a fully resilient 20% of the dividend.

What could this really mean for Dassault Systemes? As the macro economy becomes more critical, we do not argue that Dasalot is vulnerable to any downturn. In fact, the business model is very good, and the recurring income can be trusted, and most of the income here is recurring, around 80%. Customers are primary and cannot call back the company at this point of cost. The problem is the direction of development. If you annualize the current EPS, the company trades at a forward PE of 35x. If 75 percent of your growth markets are completely frozen, major spending on product development and R&D is stagnant, the expectations that still support a very high 35x PE will not be met. In addition, if new licenses are not sold, some revenue may be lost, not all revenue is subscribed, the growth may theoretically turn negative when the recession finally occurs, and the recession may be prolonged. Probably an entire 2-year bear market cycle.

Overall, we see other inexpensive enterprise technology propositions in the market, such as TeamViewer ( OTCPK:TMVWF ) . We’d never take Dassault at their current relative multiples, but we wouldn’t take TeamViewer now because the sentiment is against enterprise technology, and a stealth attack after the consumer downturn passes or unemployment kicks in could lower expectations even further. It’s a pass.

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