This Industrial Stock Could Be Worth $25 Billion

• The company is shifting revenue streams to high-margin software, recurring subscriptions, and services.

• The industrial software stock is trading at a discount to its peers.

• AI will help sustain the company’s underlying double-digit growth rate.

• 10 stocks we like better than Trimble ›

When does a hardware company become a software company? This is a good question, especially Trimble’s (NASDAQ:TRMB)A company specializing in positioning and workflow technology. Its stock is priced at a discount to its software peers due to its legacy hardware business, even though software, services and recurring revenue currently account for nearly 80% of its revenue. This is why Trimble is undervalued by up to 30%.

It could be argued that Trimble should be trading at a higher price than its peers rather than trading at a discount. This will reflect margin expansion and increased free cash flow (FCF) opportunities to generate recurring revenue from software subscriptions and services from the ongoing migration. I’ll touch on the valuation debate for a moment, but first a few words about the growth opportunities ahead.

To be clear, Trimble’s hardware will always be part of its business. The company has its roots in hardware products that provide precise positioning to customers, particularly in the construction, infrastructure, geolocation, mapping and transportation industries.

But its future lies in creating a common data environment by connecting the physical world to the digital world so that project designers and project managers can see the same thing in real time and collaborate instantly. An example would be a structural engineer remotely monitoring the real-time position of a structural member (such as a beam, column, or slab) on a construction project.

The opportunity to prevent waste and ensure on-time delivery of construction/infrastructure projects using Trimble technology should not be overlooked. Delivering an infrastructure project, such as a railway or highway, on time can save huge amounts of money.

The benefits of its software will be further enhanced by the incorporation of artificial intelligence (AI) into its solutions, allowing customers to streamline daily workflows by automating repetitive tasks, analyzing workflows (like those of vehicles in a transportation fleet), and creating actionable insights.

The key metric to watch with Trimble is annual recurring revenue (ARR), which management expects to grow at low double-digit to mid-teens annual rates through 2027. Increase in ARR will lead to increase in profit margins and cash flow generation. The consensus from Wall Street analysts is that Trimble will grow its FCF from an adjusted figure of about $750 million in 2025 to $1 billion in 2027; This represents an annual growth rate of 15%.

This mid-teens growth rate is above management’s estimates for ARR growth and reflects the potential for more ARR to be converted into cash flow. This is because the cost of offering additional software by subscription is marginal, especially compared to the cost of offering low-margin hardware products.

Trimble should trade at a premium, not a discount. A quick look at the price-FCF multiples of some of its peers shows that Trimble trades at the lower end of the group. By comparison, Trimble’s adjusted FCF of approximately $750 million (adjusted to exclude a one-time cash tax payment of $277 million on the sale of an asset) would have an FCF multiple of 25.3x in 2025. For the record, PTC It also appears to be significantly undervalued.

But here’s the thing: Trimble should probably trade at a higher price, reflecting its greater opportunity to expand margins and FCF. Let’s put it this way: A traditional, mature industrialist might trade at 20 times FCF, but a faster-growing software company might trade closer to 30 times FCF. Bentley And autodesk I’m doing it right now.

Applying a 30x FCF multiple to Trimble in 2027 could lead to a market cap of $30 billion. Conservatively applying a 25x FCF multiple would put Trimble at $25 billion; This represents a 31.4% increase over the current stock price.

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Lee Samaha It has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Autodesk and PTC. The Motley Fool recommends Bentley Systems and Trimble. The Motley Fool has a feature disclosure policy.

This Industrial Stock Could Be Worth $25 Billion originally published by The Motley Fool