Dassault Systèmes still in conquest mode

Dassault Systems is a leading provider of computer-aided design and product lifecycle management software, serving customers such as Boeing and Tesla throughout the entire manufacturing process. The company’s sales depend largely on the transportation and mobility, industrial equipment, aerospace and defense sectors.

Dassault Systèmes has a strong market position in computer-aided design (CAD) software for the automotive, aerospace and defense, and industrial sectors.

With 90% of all aircraft and 80% of all cars in the world manufactured using Dassault Systèmes software, we believe the company will remain firmly anchored in engineering teams thanks to the high replacement costs and network effect found in its interim CAD software, SolidWorks .

The company has, in our view, a broadly competitive stronghold (“Wide Moat”).

It has adapted well to new trends in its market positions such as electric vehicle design software, giving us greater confidence in the longevity of its stronghold and its ability to deliver high ROI.

Outside of CAD offerings such as Catia and SolidWorks, Dassault Systèmes has a comprehensive portfolio of information intelligence, collaboration, content sharing, and simulation software, all of which serve a portion of product manufacturing, whether it be research and development of medicine, mine planning or organization of the production line of clothing.

enovia

The most popular of these disparate offerings is Enovia, the product lifecycle management software, used across industries to connect engineers, marketing, and supply chain teams to better orchestrate the product lifecycle (PLM).

Dassault Systèmes has the largest share of the PLM market, and this exposure accounts for nearly half of the company’s $100 billion addressable market.

While there are new entrants in the mid-market PLM and CAD spaces, we believe Dassault Systèmes will be able to minimize any additional share that new players take into its markets by increasing the adoption of its platform.

The platform aims to connect a large part of Dassault Systèmes’ offerings in one place.

We believe that Dassault Systèmes will be able to significantly increase revenues from its platform over the next two years.

With a higher proportion of customers on the platform, we wouldn’t be surprised if customer churn drops and replacement costs rise, as the platform retains the benefits of using all of Dassault Systèmes’ software, which used to be more disparate.

Reasonable rating

Dassault Systèmes’ Investor Day on June 16 had a consistent message: The notion that Dassault is just an aircraft modeling company is outdated.

We agree with the wide-gap enterprise on its perception of itself, as it is clear to us that Dassault is addressing new markets in what we call the “enterprise metaverse.”

We define enterprise metaverse as using digital worlds to achieve business goals, such as faster time to market for manufacturers.

After the day of the capital markets, we can confidently repeat our fair value estimate of 37 euros.

As a result, Dassault continues to trade in 3-star territory, so we recommend that investors do not buy or sell the stock.

During the day with the financial community, Dassault reiterated his non-IFRS target for 2024 earnings per share (EPS) of $1.20 per share, which we believe we can not only meet, but exceed, because we believe healthy margin expansion is ahead for the company.

Along with the BPA target, Dassault has announced its goal of reaching more than €2 billion in cloud revenues by 2025, which we believe could be a more ambitious target, but certainly achievable in the coming years.

100 billion euros

Dassault said it currently caters to a $45 billion market, but there is a possibility that this total addressable market could grow to $100 billion through large-scale expansion of its existing verticals: manufacturing, life sciences and healthcare, infrastructure and cities.

We believe that market expansion is certainly a reality for Dassault Systèmes as it became clear during the day that companies are increasingly relying on simulation and numerical modeling to further reduce lead times.

We think that’s a driving force behind Dassault, and it’s part of the assumptions of our valuation model.

A testimonial from the electric vehicle manufacturer Rivian showed how dependent companies are on digital simulation.

Rivian said it conducted only two physical crash tests after many variations of digital crash tests using Dassault Systèmes solutions.

To put this digital addiction into perspective, it was reported in 2007 that a Volvo model had undergone as many as 100 crash tests before it hit the market.

Because physical crash testing is very expensive to conduct, we believe Dassault’s value to customers increases as the software gets smarter, supporting our margin expansion forecast.

Rivian also shared details on how it makes the vans. Amazon prime; he used the Dassault platform to model the truck’s manufacturing process before it was put into service.

This allowed Rivian to start producing the vehicles in real life much faster than without the ability to model manufacturing operations in Dassault software.

© Morningstar, 2022 – The information contained herein is for educational purposes and is provided for informational purposes ONLY. It is not intended and should not be construed as an invitation or encouragement to buy or sell the listed securities. Each comment is the opinion of the author and should not be considered a personal recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to check with a financial advisor or financial professional before making any investment decisions.

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