Ansys (NASDAQ:ANSS) moved up by nearly 4% after an upgrade from Goldman Sachs Group Inc (NYSE:GS). The Canonsburg, Pennsylvania-based engineering simulation software company was upgraded on improving productivity and profits. However, after massive amounts of growth over the last 18 months, this upgrade is too late to benefit new Ansys stock investors.
Ansys Stock Is Competitive
To be sure, the company may finally be coming into its own 48 years after its founding. Ansys specializes in finite element analysis software. This software simulates several engineering-related factors related to product development. This helps to determine how products will function under varied conditions. It also allows firms to test products before incurring higher expenses.
Through this technology, it has developed a moat that allows it to compete with the likes of Autodesk, Inc. (NASDAQ:ADSK), Microsoft Corporation (NASDAQ:MSFT) or Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG).
Goldman analyst Gabriela Borges cited this fact in defense of her upgrade. She also mentioned improved product positioning, the potential for higher margins, and a positive outlook based on a critical partnership and improving opportunities.
One move that has improved this outlook is its partnership with PTC Inc (NASDAQ:PTC). The two firms partnered to develop PTC’s Creo 3D CAD software. This utilizes PTC’s CAD technology with Ansys Discovery Live real-time simulation. It also allows design engineers to improve the quality of their products while reducing development costs.
This partnership should improve the bottom line. Still, the profit picture has already begun to show improvement. After years of stagnant revenue and profit levels, Ansys stock appears poised to grow both revenues and profits. The company saw earnings of $4.01 per share in 2017. Analysts forecast profits of $4.92 per share in 2018 and $5.42 per share the year after.
Ansys Stock Supports a High Naluation
Unfortunately for new investors, the market has likely priced these factors into the stock. Goldman mentioned the high valuation in its report, and they upgraded the stock despite a higher price-to-earnings (PE) ratio.
No doubt Ansys enjoys a clear vision and presents a competitive threat to Autodesk and other peers. However, as I mentioned in a recent article about Autodesk, its quarterly losses did not create a buying opportunity in the stock.
Ansys finds itself in a similar situation. Despite low levels of profit growth in recent years, Ansys stock moved steadily higher. It has almost doubled in value since the beginning of 2017.
As a result, the current PE for ANSS stock stands above 50, and it trades around 37.5 times earnings on a forward basis. Wall Street expects profit growth of about 22.5% this year and just over 10% next year. At current prices, the price-to-earnings-to-growth (PEG) ratio comes in at 1.66 on a forward basis, and over two when measured against current metrics.
Judging by both a PE and a PEG basis, Ansys stock appears expensive. Ansys has become a costly stock precisely because of its value proposition and product lines. This will serve both its customers and ultimately their customer’s customers well. However, it leaves little room for new investors to profit.
The Bottom Line on Ansys Stock
Although Ansys appears poised to resume profit growth, valuations have likely moved ahead of its profits. The stock has risen recently on an upgrade from Goldman Sachs.
Goldman cited an improving moat as well as increased profits and productivity in its upgrade. While I agree with the factors that led to the upgrade, I find the valuation expensive at these levels. I believe Ansys could profit new investors if it falls to a lower price. Still, at its current PE ratio, investors will likely find higher returns in other equities.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
