Up More Than 50% YTD, is Bentley Systems Still a Buy?

Software development company Bentley Systems, Incorporated (BSY) in Exton, Pa., provides open modeling and open simulation applications and infrastructure engineering software solutions to engineers, architects, and others. Because going digital remains a priority for businesses, the increasing number of infrastructure engineering projects and the growing demand for software solutions have benefitted BSY significantly. 

So far this year, the stock has surged 59.2% in price, driven primarily by the acquisition of Seequent and its strategic partnership with a leading government IT solutions provider.

However, BSY’s high long-term debt level could strain its balance sheet and restrict its cash flow in the near term. Although the company’s increasing pace of acquisitions and double-digit ARR growth have helped it improve its operating performance, the stock’s high valuation could make investors bearish.

Here is what we think could influence BSY’s performance in the upcoming months:

Issuing Convertible Senior Notes to Repay Debt

In June, BSY announced the pricing of $500 million of convertible senior notes due 2027, with an option for investors to purchase up to an additional $75 million of the  notes. BSY expects the net proceeds from the offering  to be roughly $487 million, which the company  plans to use to  repay existing debt and to fund  the cost of expected capped call transactions related to the offering. However, the transaction could lead to a dilution of shareholder value in the near term.

Growth-Focused Acquisitions

BSY completed the acquisition of Seequent Holdings Limited, a global leader in 3D modeling software for Geosciences, in June, for approximately $900 million in cash and 3,141,342 BSY Class B shares. Furthermore, in July its Seequent business unit acquired Aarhus GeoSoftware, a Danish geophysical software company, to add new capabilities to its workflow and extend its solutions. In addition, last month, it acquired Imago Inc, a cloud-based software developer, to boost its technology solutions portfolio and add greater value to its users. These acquisitions demonstrate the company’s continued growth and progression to strengthen its position in the industry.

Premium Valuation

In terms of non-GAAP forward P/E, BSY is currently trading at 84.72x, which is 236.9% higher than the 25.15x industry average. In addition, its 9.36 non-GAAP forward PEG ratio  is 422.1% higher than the 1.79x industry average. The stock’s 22.14x forward EV/Sales is 436.7% higher than the 4.13x industry average.

BSY’s 22.19 trailing-12-month Price/Sales and 42.14 Price/Book multiple are significantly higher than the industry averages of 4.41 and 4.86, respectively.

Mixed Financials

BSY’s subscription revenue rose 17.6% year-over-year to $185.45 million in the second quarter, ended June 30, 2021. But its perpetual licenses revenue decreased 8% from the prior-year quarter to $11.39 million. The company’s gross profit for the quarter totaled $169.48 million, representing a 14.8% increase from its  year-ago value. However, its total operating expenses rose 33.3% year-over-year to $137.26 million, while its income from operations declined 27.7% from the prior-year quarter to $32.22 million. In addition, as of June 30, 2021, BSY’s cash and cash equivalents stood at $131.15 million, while it had long-term debt of $1.27 billion.

Consensus Price Target Indicates Marginal Upside

Of the eight Wall Street analysts that provided ratings for the stock, five rated it Buy, and three rated it Hold. The $66.71 consensus price target represents a 0.8% potential upside from yesterday’s closing price of $66.20.

POWR Ratings Reflect Uncertainty

BSY has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. BSY has a B grade for Quality. The stock’s 77.6% trailing-12-month gross profit margin, which is 58.2% higher than the 49% industry average, is in sync with this grade.

However, the company has a Growth grade of C, which is in sync with its mixed financials and growth prospects. In terms of Value Grade, BSY has a D. The stock’s higher-than-industry valuation multiples are consistent with the grade.

In addition to the grades I’ve highlighted, one can check out additional BSY ratings for Momentum, Stability, and Sentiment here. BSY is ranked #41 of 146 stocks in the D-rated Software – Application industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

While BSY’s stock price surged 59.2%year-to-date on the back of its recent acquisitions and continued increase in subscriptions, its stretched valuation multiples and mixed operational performance could make investors cautious about the stock. Moreover, BSY’s  heavy debt load might cause the stock to suffer further declines in the coming months. So, we think investors should wait for its financials to stabilize before investing in the stock.

How Does Bentley Systems (BSY) Stack Up Against its Peers?

While BSY has an overall C (Neutral) rating, one might want to consider looking at its peers Commvault Systems, Inc. (CVLT) and Open Text Corporation (OTEX), which have an overall rating of A (Strong Buy).

BSY shares were unchanged in premarket trading Thursday. Year-to-date, BSY has gained 63.69%, versus a 21.86% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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