The Secret’s Out: Buy This Hot Tech Stock Before Wall Street Goes Wild

Positioning and workflow technology company Trimble (TRMB 1.68%) it has a bright future, but it is not the most well-known or appreciated company. There are various reasons for this, but enterprising investors who want to dig deeper into stocks could generate exceptional returns. Here’s what you need to know before you buy.

Trimble is not a consumer oriented business

You may have come across Trimble hardware and software solutions if you work in the construction, transportation, agriculture or mapping industries. For those who don’t know the company, its origins lie in precision positioning hardware, but its future lies in the growth of its software solution and customer services.

Rather than just providing positioning and sensing technology, Trimble software and services help customers plan and model their operations (think truck fleets planning routes) and analyze and optimize daily operations (think complex construction sites where something changes every day).

This knowledge and understanding that its software/recurring revenues are coming in at higher margins and becoming an increasingly important part of its customers’ daily workflow makes it much easier to understand the company’s underlying growth prospects.

Annual recurring revenue and cash flows, not revenue and earnings

Trimble’s annualized recurring revenue (ARR) and cash flow generation are better ways to understand the company’s growth path than just looking at revenue and earnings. Management defines its ARR as “estimated annualized value of recurring revenue.” It includes the subscription and its maintenance in a quarter and the contract value of the licenses in the quarter and then annualizes this figure.

Image source: Getty Images.

As such, it provides an excellent picture of the evolution of Trimble’s business, rather than just looking at the initial revenues and earnings on Trimble’s income statement.

The difference is demonstrated below in the table showing Trimble’s guidance for 2024. Single-digit organic revenue growth is good enough, but note that Trimble’s ARR is growing at a low double-digit rate.

Data source: Trimble presentations.

ARR is also a better guide to what kind of free cash flow (FCF) Trimble can generate in the future. This is demonstrated by looking at the Wall Street analyst consensus for revenue, earnings before interest, taxes, depreciation and amortization (EBITDA) growth. You shouldn’t take these numbers as gospel, but they serve to illustrate how increasing underlying ARR leads to increased FCF generation over time.

The consensus is for $500 million in FCF in 2024, $648 million in 2025 and $869 million in 2026. To put these numbers in context, based on the current market cap of $13.7 billion, Trimble would trade at 15.8x FCF in 2026. several years away, the company’s ARR growth remains strong, and rising margins and cash flow from software growth and recurring revenue ensure increased FCF conversion.

You won’t see all of this if you’re solely focused on growing Trimble’s revenue.

Data source: marketscreener.com. EBITDA = earnings before interest, taxes, depreciation and amortization.

Trimble’s outstanding audit issue

Another reason Trimble may fall under the radar of being a “buy” by many investors is caution over the issue of an audit of its 2023 financial results by EY. This was revealed in May and at the time Trimble treasurer Phil Sawarynski said: “Neither EY nor Trimble had sufficient documentation related to certain IT controls and other controls for revenue-related systems and processes.” CFO David Barnes noted: “This is just about internal controls. No issues with our numbers have been identified by EY or us.”

CEO Rob Painter reiterated that position in August and expects the EY re-audit to be completed in about a month. While there is still an element of risk involved, so far, nothing suggests it will have any financial impact on Trimble.

Image source: Getty Images.

A stock to buy

Trimble’s estimated 11%-13% ARR growth in 2024 is all the more impressive given that one of its end markets (freight) is in recession. It demonstrates the importance of its solutions in improving the daily workflow of its customers and the potential for long-term growth.

Overall, the stock is an attractive buy for investors looking to buy into the stock before the rest of the market catches on. The company is doing very well in a challenging environment, and its FCF is set to improve significantly over the coming years, making the current valuation look very attractive.