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It has been a while since I covered shares of Bentley Systems, Incorporated (BSY). In fact, it was the spring of 2021 when I concluded that shares were valued too rich to offer any appeal.
The company went public in the fall of 2020, on the back of the post-pandemic (stock market) recovery. While the company saw decent growth, I failed to see appeal, with shares trading in the mid-forties at the time. Fast forwarding three years in time, shares have seen very mediocre returns, marking a massive underperformance as appeal is still not found here, with shares trading at nosebleed valuations.
Bentley – An Infrastructure Software Play
Bentley is a provider of software which is used in infrastructure engineering, with the business being founded by the Bentley brothers in the 1980s. Over time, the company has developed integrated software across used in projects, infrastructure and geographical applications, used for public works, roads, rails, airports, industrial applications, power plants and factories, among others. With its key MicroStation product suite, it aims to be a competitor again the dominant AutoCAD platform.
Large projects tend to become very complex because of the sheer size and interconnectedness of many disciplines. This results in great complexity in design, the actual build, but certainly also in maintenance as well. With increased complexity, and a need to update existing infrastructure, the outlook for such software services is solid, as Bentley can really be regarded as a long-term secular growth play.
The company went public at $22 per share and immediately rose to $28 per share, granting the company a $7.8 billion valuation, equal to 10 times sales. That felt rich, with topline sales growth reported at high single digits. That being said, many of its peers were trading at similar and high multiples, including Autodesk (ADSK), Trimble (TRMB) and Aspen Technology (AZPN), but that would not rule out that the entire sector was trading at too high multiples, of course.
Valuation discussions became even worse as shares rose to the $46 mark by the spring of 2021, pushing up the enterprise valuation to $15 billion at a time when sales were trending at $900 million per annum. The company furthermore announced a substantial $1.05 billion deal for Seequent, although that few financial details on the geological and geophysical modeling firm were announced.
Given the sky-high valuations I was contemplating a short position, not necessary as an outright short but as a hedge to long positions in technology names as I failed to see appeal.
Fast Forwarding
In the end, shares of Bentley have seen greater momentum during 2021, peaking around the $70 mark later that year, only to fall to the $30s in 2022, after which have largely traded around the $50 mark over the past year.
The very modest price returns have come while the company has seen continued growth. In February of this year, Bentley posted a near 12% increase in full-year sales for 2023 to $1.23 billion, driven by a combination of organic growth and bolt-on dealmaking. This marks solid growth, as this was a $900 million business early in 2021. Nearly 90% of these sales are generated from subscriptions, accompanied by modest service and perpetual licenses income.
The company posted GAAP earnings of $327 million, equal to $1.00 per share, but this earnings number is quite meaningless as it is largely driven by a big tax refund. The company posted adjusted earnings of $0.91 per share, up 6 cents from the year before. That number is not realistic as well, as it excludes about $0.25 per share in stock-based and other compensation costs. If we accept all the other adjustments, but strip out these, earnings are seen at $0.66 per share, still yielding a huge earnings multiple.
With 333 million shares now trading at $53, the company commands a $17.6 billion equity valuation, for a $19 billion operating asset valuation if we factor in a net debt load of around $1.4 billion. The company guided for 2024 sales to increase some 10-12% to $1.350-$1.375 billion, to be accompanied by a full point improvement in adjusted operating margins.
In May, the company posted a 7% increase in first quarter sales to $338 million, with adjusted earnings up six cents to $0.31 per share, or $0.23 per share earnings if we adjust for stock-based compensation expenses. This makes that the company is still well positioned to meet the 2024 guidance, but realistic earnings of around $0.70-$0.80 per share still translate into a huge earnings multiple of around 70 times, with the company trading around a premium 14 times sales multiple!
In April, the company had to deny some M&A rumors, as Schneider Electric was rumored to be looking to acquire the business. While this might still happen, that would, of course, take place at a huge premium and likely be dilutive to the acquirer in this case.
What Now?
The reality is that shares of Bentley Systems, Incorporated have seen cumulative 10-15% returns over the past three quarters, marking lackluster returns, certainly in comparison to the wider market. That in itself made a cautious stance warranted, but even amidst this underperformance and continued solid top-line sales growth, Bentley Systems, Incorporated valuations are quite demanding.
After all, the business model relies on engineers signing up for the software, and certainly amidst labor shortages it will be difficult to see strong growth in this area. Growth (in part) has to come from market share gains here, which are far from a given as the company competes against industry leader Autodesk.
In fact, I am still barking at a 14 times sales multiple and a realistic 70 times earnings multiple, making me very cautious here, even as this remains a hot and richly valued segment of the market. Given all this, I am still reiterating my very cautious stance toward Bentley Systems, Incorporated shares here, as the predictability of this growth might have been overpriced a bit here, certainly in a higher interest rate environment.
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