PTC Inc

PTC's annual recurring revenue grew 9% in constant currency for the third quarter, topping its guidance. Organic ARR growth was strong across both product groups. CAD products' ARR was up 8% year over year, and PLM's ARR growth accelerated by 100 basis points sequentially to 10%.

Why it matters: The now-completed Kepware and Thingworx divestiture allowed PTC to deepen the potential of its core products as the artificial intelligence system of record. PTC signed its largest-ever, seven-figure AI deal in industrial automation and also displaced competitive offerings with its AI roadmap. We think PTC's near-term AI opportunities come from its cloud-native products led by Onshape and Arena. Its modernized data model is ahead of other mid-market counterparts, laying a solid foundation for PTC's ARR growth to further improve from the current level of high single digits.

The bottom line: We maintain our $160 fair value estimate per share for wide-moat PTC. Shares currently look undervalued. While PTC's 2026 performance has met expectations so far, investors would be eager to search for any signs of AI-driven growth acceleration when PTC discloses 2027 guidance next quarter. We reiterate our view that AI is a long-term growth tailwind for PTC. While positive AI traction has become a driver of PTC's persistent ARR growth, we do not expect any immediate surprise from the company's near-term guidance to trigger a rapid re-rate on the name. AI adoption across the industrial manufacturing sector takes time, and positive return on investment would only come when clients connect enough product data that enables AI-driven insights across the entire product lifecycle.

Coming up: Management raised full-year ARR growth guidance by 75 basis points at the midpoint to 9.0%-9.5%. Full-year revenue guidance of $2.69 billion-$2.75 billion was $20 million higher, and EPS guidance of $8.46-$9.18 also increased by $0.36 at the midpoint, compared with previous guidance.

Our fair value estimate for PTC is $160 per share, which implies an adjusted price/earnings ratio of 18 times and an enterprise value/adjusted EBITDA ratio of 13 times. We model a 7% cumulative annual growth rate for PTC over the next five years, mainly driven by the secular expansion of the manufacturing sector and upsell opportunities of cloud-based solutions to existing customers.

We think PTC’s top-line growth should stabilize over the next few years as the company wraps up its ServiceMax acquisition and the Kepware and Thingworx divestiture. Both PLM and CAD software should experience high-single-digit growth, mainly supported by organic growth of new cloud-native products such as Onshape. We estimate that PTC’s CAD software should grow slightly faster than PLM software because of its smaller revenue base, and there is additional upside if PTC can carve out a niche in the mid-market. The annual growth of services revenue should remain in the mid single digits as PTC continues to provide support to its customers.

PTC is a mature company with a very stable user base. We do not foresee any major margin structure changes over the next decade. We forecast the company’s gross margin to largely remain stable over the next decade . We expect the adjusted operating margin to dip slightly in fiscal 2026 as the volume of license renewals tapers. Over the long term, we model a stable adjusted operating margin, considering the uncertainty AI can bring to PTC's pricing model.

We assign PTC a wide economic moat because of the switching costs derived from its leadership in the industrial design software market. PTC is one of the earliest entrants in the manufacturing-focused software market. Over the past forty years, the company has built a large user base with strong retention rates that support high switching costs. As PTC continues to launch new cloud- and AI-powered features to modernize manufacturing workflows, we think it will very likely generate excess economic returns over the next 20 years.

PTC’s main products include CAD software Creo and the PLM software Windchill. The company also offers several other software modules commonly used by manufacturers, such as Codebeamer, ServiceMax, and Vuforia, which assist in managing and delivering product data.

PTC customers often need to use multiple tools during production. For example, a camera manufacturer’s workflow within the PTC ecosystem begins with the industrial design team using Creo to refine the camera’s design. As they explore different design ideas, Windchill automatically logs any metric changes into its central database. A separate team handling the camera’s software features, like auto-focus, might use Codebeamer to host all the code. Meanwhile, before mass production, Vuforia’s augmented reality features can help engineers detect potential issues. Finally, if an end user experiences any malfunctions, ServiceMax makes it easier for local maintenance professionals to identify and fix the problem. A streamlined workflow, like the one presented above, requires different PTC components to work closely with each other. It is in the customer’s interest to sign up for software from one provider to make sure the production process is smooth.

PTC primarily competes in the higher end of the manufacturing design software market alongside two European firms—Dassault Systèmes and Siemens . The premium market typically prohibits a mix-and-match of CAD and PLM software from different providers because of customers’ high stability requirements. Switching from PTC’s Creo to Dassault’s Catia, for example, requires abandoning PTC’s Windchill for Dassault’s Enovia, effectively doubling the migration effort. Additionally, users may find it difficult to replicate their existing workflows on the new platform because of differing features and layouts, forcing them to find workaround solutions. In summary, the close integration of CAD and PLM software substantially raises users’ switching costs across different industrial software providers.

Other factors within PTC also support strong switching costs. PLM is a vital enterprise system for manufacturing companies, overseeing all information through a product’s development lifecycle. Manufacturers must halt production if their PLM system stops working properly. Similarly, CAD drawings often contain the company’s most valuable intellectual property, which translates to high security and reliability requirements. Switching to new CAD or PLM software often comes with a high risk of data and productivity losses because different system providers store information in incompatible formats. Although design software’s migration should be less complicated than enterprise resource planning systems, the scope still goes beyond moving away from a single-point solution. Moreover, designers and engineers need time—generally three to six months—to reach basic proficiency with a new system.

PTC’s impressive customer retention metrics further reinforce its high switching costs. Over the past decade, PTC has significantly reduced its annual churn rate from around 9% to below 5%, with core products like Creo and Windchill maintaining churn below 3%. Although the company does not disclose its net revenue retention, we see strong quantitative evidence suggesting that the average customer lifespan can reach 20 years. We also anticipate that customer churn will decline further after PTC’s divestment of its Internet of Things business in 2026. Notably, PTC’s retention metrics are more persuasive than those of emerging software firms, given its operation in a stable, mature market segment.

Although some signs of a network effect exist for PTC, we do not believe it can grow this effect organically enough to turn it into a source of its wide moat. The high-end manufacturing design software market is relatively concentrated, with three companies (Siemens, Dassault Systèmes, PTC) taking the majority of market share. However, PTC is the smallest, resulting in the weakest network. All three companies have established dominant niches through decades of competition, making it challenging to gain market share from another company. For example, Boeing and Airbus are unlikely to leave Dassault’s ecosystem because of Catia’s excellence in top-tier aircraft exterior design. Manufacturers focused on streamlined assembly tend to prefer PTC’s industry-leading PLM Windchill. If a customer seeks the most comprehensive all-in-one solution, Siemens is usually the preferred choice. To develop a true network effect where existing users benefit more as new users join, PTC would need to expand its customer network for better interoperability, which appears unlikely in the near future.

PTC’s focus on product lifecycle management makes it a frontrunner in developing AI and cloud-based software solutions leveraging product data.

PTC offers a menu of flexible choices when it comes to cloud-based SaaS offerings, making it easier for customers to sign up for new offerings that modernize their workflows.

PTC’s relative cost friendliness can shine during economic downturns when customers evaluate different options in the high-end manufacturing software market.

PTC’s frequent M&A activities can potentially lead to execution risks if the acquisition or divestiture undershoots expectations.

Capturing the most valuable workflows from the top manufacturers is an uphill battle for PTC as the company’s computer-aided design capabilities lag competitors.

Cloud adoption among manufacturing companies can come slower than we expected, hurting PTC’s revenue growth and margin expansion.