Company Reports

We raise our fair value estimate for narrow-moat Bentley Systems to $48 from $42, following a solid first-quarter earnings report. Annualized recurring revenue, or ARR, continues to be affected by perpetual license sales in China, but the firm’s solid public services sales base and growing SMB market kept the firm’s top-line growth strong. Looking ahead, we expect savings from scaled-based operating leverage and increased sales from digitization in end markets to fatten margins. Shares were up marginally following the earnings release but continue to screen as overvalued relative to our raised valuation.

Bentley Systems is a moaty engineering software firm that has solid growth opportunities ahead, in our view. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has expanded its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their markets remain underpenetrated—like digital twin deployment. In addition to its platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue. These factors combined have us confident Bentley can achieve top-line growth over 13% over the next five years, with margin expansion in tow.

We maintain our $42 fair value estimate for narrow-moat Bentley Systems for now, as Reuters reported April 18 that the company is exploring strategic options, including a possible sale of the business. We also maintain our $240 fair value estimate for narrow-moat Cadence Design Systems, which Reuters suggested is among the companies interested in acquiring Bentley. Shares of Bentley appear modestly overvalued to us on a fundamental basis if no deal were to go through. We continue to view Cadence as overvalued, independent of this news and with no guarantee that Cadence will emerge as the winning bidder. Cadence's shares were down about 3% midday, and we surmise that the market is reacting negatively to this report, as investors might fear that Cadence could potentially overpay for Bentley. Cadence will report earnings on Monday, April 22, so if it were to win this bid for Bentley, we wouldn't be stunned if the merger were to be consummated over the weekend and discussed in more detail Monday.

We are maintaining our $42 fair value estimate for narrow-moat Bentley Systems, after the firm reported a mixed fourth quarter, with earnings per share coming in above our prior expectations but revenue falling a bit short. Growth in annual recurring revenue was tepid in the quarter, due to customers in China increasingly opting for perpetual licensing, leading to Bentley’s 2024 revenue guidance falling short of our prior estimates. We still think Bentley is well positioned to capitalize on digitization in end markets over the long term, with the opportunity exacerbated by the significant resource capacity gap at engineering firms. Despite the attractive growth profile, shares remain overvalued relative to our unchanged valuation.

Bentley Systems is a moaty engineering software firm that has solid growth opportunities ahead, in our view. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has expanded its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their markets remain underpenetrated—like digital twin deployment. In addition to its platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue. These factors combined have us confident Bentley can achieve top-line growth over 10% over the next five years, with margin expansion in tow.

Narrow-moat Bentley Systems reported third-quarter financial results that nicely beat our expectations as well as the market’s on the top and bottom lines. Still, ARR growth was moderated due to its increased sensitivity to the quarter’s total business days, as E365 subscriptions now make up a plurality of ARR. As a reminder, E365 subscriptions charges customers based on daily consumption of Bentley applications. Despite the subscription type’s variability, we like that Bentley has this option as we think it’s a great entry point for SMBs that have the potential to grow their business under Bentley’s customer roster. All in all, the firm maintained its overall outlook for the fiscal year, which we think is fair given E365 variability and the pace of digital transformation ahead for customers. Shares are up 11% upon results, but we think the market is being overly optimistic on the pace of digital transformation of Bentley customers in the near term, as efficiency gains are promising but we think the industry is saturated with inertia. As a result, we are maintaining our $42 fair value estimate, which leaves Bentley shares overvalued, in our view.

Bentley Systems is a moaty engineering software firm that has solid growth opportunities ahead, in our view. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has expanded its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their markets remain underpenetrated—like digital twin deployment. In addition to its platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue. These factors combined have us confident Bentley can achieve top-line growth over 10% over the next five years, with margin expansion in tow.

We have initiated coverage on Bentley Systems with a $42 fair value estimate and a narrow moat rating. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has elevated the makeup of its offerings by expanding its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their respective markets remain underpenetrated—like digital twin deployment. In addition to its newer platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue.

Bentley Systems is a moaty engineering software firm that has solid growth opportunities ahead, in our view. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has expanded its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their markets remain underpenetrated—like digital twin deployment. In addition to its platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue. These factors combined have us confident Bentley can achieve top-line growth over 10% over the next five years, with margin expansion in tow.