Nemetschek Stock: A Bullish Case For A Long-Term Holding (OTCMKTS:NEMTF)

ChayTeeI rate Nemetschek (OTCPK:NEMTF)(OTCPK:NEMKY) as a buy as the company is making a successful transition in increasing the participation of the annual recurring revenues (ARR) as expected, good first quarter results in 2024, a reduction of the interest rates by the European Central Bank (ECB), and the acquisition of GoCanvas, which will enable Nemetschek to reinforce one of its most important divisions and solidify double-digit revenue growth for the next few years, considering that those revenues will have a higher component of recurrency. I’ve written about NEM in a previous article in December 2023 with a “hold” rating, as my conservative assumptions gave me an intrinsic value of 86 euros per share when the stock price was around 77 euros per share. Now, the stock price is around 95 euros per share, as the market is gaining more confidence in the double-digit growth of the company’s growth prospects after the acquisition of GoCanvas and the very good management execution. CEO Yves Padrines took over in 2022 and is demonstrating very good execution and delivering very good metrics, while uncertainties associated with the industry are dissipating. I am holding NEM at a cost of 60 euros per share with a weight of 25% of my entire portfolio, so I was convinced about its long-term prospects even when the market was pessimistic about its industry in the years 2021, 2022, and 2023. If you want to learn more about NEM’s qualitative aspects, you should read my previous article to understand the company’s competitive advantages and business model. Context NEM’s revenue growth was 9.4% as of March 2024 YoY, whereas net income and EPS grew 17.4% YoY and 13.3% YoY, respectively, in the same period, beating analysts expectations. NEM is in the process of increasing the participation of its subscription model from its total revenues, so it was understandable that there would be a slowdown in revenue growth for 2023 compared to 2022, which was 6.2% YoY. This is a long-term benefit for the company, making its business model even more resilient and predictable. NEM’s quarterly report Q1 2024In the table above, we can see that the participation of the licenses is being reduced, whereas recurring revenues and subscriptions are showing a healthy growth of 24.5% and 66.5%, respectively, YoY. Software licenses are just a one-off payment, so the company is reinforcing its recurring revenues, which make its free cash flows (FCF) even more resilient. Annual Report 2023In the chart above, we can see how the transition to increase the recurring revenues is doing well, as it can be seen that 76.6% of the total revenues are recurring in 2023 compared to 66.4% in 2022. So, it’s clear that NEM keeps advancing in this transition successfully in the first quarter of 2024. When the company announced these changes, I thought that they would deliver negative growth, which could have been understandable, but NEM surprised me by showing very good execution in this hard transition. To have a benchmark, NEM’s competitor, Autodesk (ADSK), was involved in a similar transition to a subscription model in the years between 2016 and 2019, showing a mediocre performance in those years, negative revenue growth, negative net income, poor FCF, low ROIC and ROE, etc. Conversely, NEM is taking this path in a very smooth way, still showing very good metrics: AuthorIn the table above, we can see that ROIC and ROE have been kept above 20% in the last 2 years, and the FCF margins have been very stable as well, coupled with a low total debt over FCF. The only metric impacted by this transition was revenue growth in 2023, which was a single-digit revenue growth of 6.2% when this company used to deliver double-digit revenue growth, but still, it’s positive. In 2020, revenue growth was single-digit, but it was due to COVID-19’s effects on the global economy. GoCanvas acquisition In June 2024, NEM announced that it bought 100% of GoCanvas, headquartered in Reston, Virgina, US, which is a leading provider of field worker collaboration software that digitizes traditionally paper-based processes, simplifies inspections, improves safety, and maximizes compliance with more than 300,000 active users worldwide in the first quarter of 2024. GoCanvas was founded in 2008 and has more than 300 employees with locations in the US, Canada, Australia, and South Africa. In recent years, GoCanvas has generated an ARR of $67 million per year, growing at 20% per year, which will keep reinforcing the NEM’s overall ARR. GoCanvas’s operating margins are below the average of the NEM’s subsidiaries, but those will be improved by taking advantage of NEM’s operating leverage, synergies, and economies of scale given its global presence. NEM paid for GoCanvas 11.5x GoCanvas’ ARR of 2023, which is not a cheap transaction, but NEM has the chance to grow the business fast considering its global presence. Now, this new subsidiary will reinforce the Build segment, which includes subscriptions and SaaS products, connecting openly with other AEC/O solutions and platforms. Under this division, GoCanvas fits with the Build segment’s strategy, which represents around 31% of the total NEM’s sales, with a TAM expected to grow at 15% per year in the next few years. The transaction will not impact the NEM’s balance sheet, as the company paid with its own cash and existing credit facilities. Annual Report 2023It’s worth mentioning that part of the NEM’s strategy is to reinforce the Build and Manage Divisions, as both represent a lower percentage of the total revenues as of FY 2023 while being the least digitalized areas, so both segments offer significant long-term tailwinds. The acquisition of GoCanvas is aligned with this strategy as that new subsidiary will be part of the Build segment. Valuation According to SA, all the multiples for valuation indicate that NEM is expensive compared to its peers: SANEM is a high-quality business, so most of these multiples assume that every company has the same quality, which is not true. So, I will calculate an approximate intrinsic value based entirely on NEM’s own merits. First, I will need to make certain assumptions: Outstanding shares: 117,071,429 (as of December 2023) FCF Margins: 27% (average of the last 5 years) I assume that NEM is held until the year 2030. Revenue growth for 2024 and 2025: according to consensus. Revenue growth beyond 2025: I assume 15% annual as I estimate that its migration process to a full-subscription model is completed. P/FCF 2030: 41x (average of the last 9 years) Discounted rate: 9% AuthorBased on our assumptions, I make a projection of revenue growth of 11% for 2024 and finally 15% for 2025 and beyond. So, I take the revenues projected for 2030, and then I multiply those revenues by the FCF margins of 27%. NEM has been very consistent in the last 5 years, so that FCF margins could be even higher for 2030, particularly when the company is making a successful transition to more recurring revenues; then, as a result, I get an approximate FCF of 590.28 million euros for 2030. Now, I take that FCF of 590.28 million to be divided by the outstanding number of shares of 117.07 million to get a FCF per share for 2030, getting 5.04. In this sense, I take the FCF per share of 5.04 and multiply it by 41, which is the NEM’s average P/FCF of the last 9 years. Then, I get a target price of 206.7 euros per share in 2030, so I calculate the present value to bring it back to 2024. Thus, finding the intrinsic value: Intrinsic value = 206.7/(1+discounted rate)^7 Finally, I get an approximate intrinsic value of 113 euros per share, which would leave us with a margin of safety of around 20% as the stock price is trading at around 94 euros per share currently. I should notice that the stock price reached its peak in 2021, at around 119 euros per share, so the stock still needs to surpass its maximum historic levels as I consider it a long-term compounder. Now, you should bear in mind that this stock could face high volatility in the short term, so it’s convenient for a long-term investor to buy shares gradually. I trust in the rock-solid business model, its competitive advantages, which were explained in my previous article, its excellent growth prospects as the construction sector is among the least digitalized industries, and its high-quality management. I consider that the best strategy for this stock is the “buy and hold” strategy, given its solid competitive advantages and the company’s ability to deliver long-term value. Risks NEM has demonstrated itself to be a high-quality company with clear competitive advantages and very good management; however, as with any other stock, there could be risks that we should be aware of. The competition does not concern me, as I explained in my previous article. The sector is a fragmented market, and the software offered by companies like NEM is very sticky, so the switching costs are significant. Nevertheless, as a long-term investor in NEM, I was wondering if there was a possibility of disruption by AI models of most of the software offered by NEM, so I started reading different sources. There is a very interesting company named Togal.AI that offers solutions for takeoff in construction. A takeoff is the process where contractors determine how much of each material they will need to complete a project. As such, a company like Togal. AI enables construction users to manage a wider spectrum of file types with AI trained for architectural floor plans. This AI technology is able to recognize and quantify net area, gross area, linear counts, walls, etc., automatically classifying room types and wall types. Bluebeam, a NEM’s subsidiary, also offers takeoff tools, so I was wondering if these new start-ups that offer AI software can disrupt a company like NEM. Companies like Togal. AI could emerge to offer AI models to disrupt different services; however, NEM covers all the stages in the construction, having developed very sticky software that offers several valuable features to the users, which makes it very difficult that these start-ups can disrupt by themselves companies like NEM or Autodesk given the several decades they have been in the market, adapting their software to the user satisfaction through trial and error. Most likely, these new companies offering AI models for construction would be absorbed by one of these players in the sector, such as NEM, Autodesk, Dassault Systems, Bentley Systems, etc. A report about the possibility that AI might disrupt computer-aided design (CAD)) systems such as NEM seems to back up my argument that they will not destroy names like NEM but, on the contrary, those technologies will reinforce them in the long term as it states that this new emerging AI technology would be integrated into most of these CAD softwares given the well-established names in the sector. I think that is very difficult that outsiders offering these AI models that cover parts isolated of the whole process in the construction sector ending up disrupting companies like NEM as they are finding difficulties to penetrate that market; for instance, in Reddit, I found that there are people who are aware of these new AI models like that offered by Togal.AI, but they are happy with brands like Bluebeam, NEM’s subsidiary, because these brands are constantly improving over the years, and in particular Bluebeam, offering other valuable features for batch linking, OST, visual search, drawing version comparison, able to host the file on the cloud directly from Bluebeam and have collaborators, etc Companies like NEM are truly embedded in the user’s minds as part of the company’s strategy to hold constant feedback over the years, so that’s why it makes sense that these new AI models would not be able to disrupt NEM’s business model, and most likely, if these new AI models prove to be very valuable, they will end up being acquired by companies like NEM. On the other hand, NEM is taking AI and other important strategic aspects seriously, such as client-oriented solutions, heightened market coverage, innovative future products, and continued internationalization. In this sense, NEM is investing in start-ups to accelerate the company’s own innovative strength while promoting close cooperation between those start-ups and NEM’s brands. I want to highlight some of the NEM’s investments in some of these start-ups: Preoptima, based in the UK, is a software solution for calculating and reducing the carbon footprint in the construction industry, incorporating artificial intelligence and generative design. SmartPM software, based in Atlanta, US, is a cloud-based platform for increasingly automated project management in the construction industry. NEM has also provided seed capital to an Irish start-up, LiveCosts, which offers an innovative IT solution for the efficient cost monitoring of construction projects. LiveCosts’ SaaS solutions offer strong synergies with existing NEM’s solutions in its Build Segment. NEM invested in a start-up based in the UK, Stylib, that is a platform based on AI and machine learning as a SaaS solution that enhances the planning and management efficiency of construction projects while helping to drive the digital transformation in the construction industry. As you can see, NEM is seeking to incorporate AI into different elements and features as a way to accelerate digitalization in the construction sector, which is among the least digitalized sectors in the world. In my view, this is the risk that concerned me the most before starting a position, but I gained much confidence gradually noting the long-term vision of the management, its sound strategy with its customers, the different trends the company needed to surf since it was founded in the 1960s, and how the company has reinforced its moat through very smart acquisitions and reinvestments in projects that improve the customer’s experience with each of the softwares. Final Thoughts I consider NEM a strong business model and a high-quality company that used to trade at high multiples, and sometimes a short report on companies like NEM does not give us enough information to appreciate how good they truly are. In this article, I wanted to show not only that NEM might be one of those few European gems that truly deserves to be included in any portfolio with a long-term horizon, but also that there is more updated information that supports my bullish thesis that even at this current price, the stock has room to experience more capital appreciation as the migration to a subscription model is doing very well, which increases the quality of the revenue growth, making the free cash flows generated more stable and resilient even in hard scenarios. Finally, I like how the company has been taking steps to avoid future AI disruptions by investing in start-ups that offer technology based on AI that might be incorporated within the NEM’s portfolio of products and by making acquisitions of companies like GoCanvas that reinforce one of its most promising divisions, which is the Build Segment. All of these factors related to the NEM business model give much conviction to adding more shares if there are strong movements given its high stock volatility, which we can use in our favor. My strategy with this stock is to hold it for the long haul. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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