PTC: A Hidden Gem in the Software Sector?

In a software industry where giants like Microsoft, SAP, and Oracle dominate headlines, PTC (NASDAQ: PTC) has quietly built a track record of consistent earnings growth and margin expansion. Despite trailing the sector's blistering pace over the past decade, PTC's fundamentals suggest it could be undervalued and primed for a re-rating. Let's dissect its potential through the lens of earnings power and valuation.

The Case for PTC's Sustained EPS Growth

PTC's earnings per share (EPS) have grown at an average annual rate of 13.8% over the past decade, a robust clip that outperforms the broader market. While the software industry's average EPS growth clocked in at 17–21%, PTC's recent performance has been particularly sharp. In the trailing 12 months (TTM) ending March 2025, its EPS surged by 53% year-over-year, driven by margin expansion (net profit margins jumped to 18.8% from 12.8% a year earlier) and strong execution. This outperformance contrasts with the S&P 500's 9% consensus EPS growth forecast for 2024, downgraded from earlier 11% estimates.

The chart reveals PTC's resilience: even as the S&P 500's EPS growth fluctuated between 4% and 6% annually over the past five years, PTC's growth averaged 14.4%, with the most recent quarters defying expectations. Its ability to consistently beat quarterly earnings estimates—all four quarters of 2024—suggests management has mastered operational discipline.

Undervalued Relative to Peers?

PTC's current P/E ratio of 24.5 lags behind the software sector's average of 28, even as its margins and return on equity (13%) are competitive. This discount appears unwarranted given its recurring revenue model (70% of revenue from subscriptions) and exposure to high-growth sectors like IoT and industrial automation.

The company's software solutions, such as its Windchill PLM and ThingWorx IoT platform, are embedded in critical infrastructure projects, offering stable cash flows. Meanwhile, the S&P 500 trades at a 21.5x P/E, suggesting PTC's valuation is doubly discounted—by both sector and market multiples. This gap hints at a potential revaluation if investors acknowledge its structural advantages.

Risks and Countervailing Forces

Critics will note that PTC's recent TTM EPS growth of 4.97% lagged the software industry's 18.9% pace. Its reliance on legacy manufacturing clients also exposes it to economic cycles. Additionally, the broader market's moderating EPS growth—the S&P 500's 2024 forecast of 9% versus 2023's 18.9%—could weigh on multiples. However, PTC's margin expansion and recurring revenue stream may buffer it better than peers.

Investment Thesis: A Long-Term Play

PTC's valuation discount and margin resilience make it a compelling contrarian bet. If the company can sustain its earnings momentum amid a slowing software sector, its P/E could normalize toward 27–28x, implying a 15–20% upside. Meanwhile, its dividend yield of 1.2% offers downside protection, even if growth slows.

The chart shows PTC underperforming the S&P 500 by -14% over five years despite superior EPS growth. This divergence suggests a mispricing that may correct as investors focus on fundamentals over macro noise.

Conclusion

PTC isn't a high-flying disruptor, but it's a well-oiled machine in a sector that's hard to beat. With a P/E well below its peers, margin tailwinds, and a business model aligned with industrial digitization, it offers a rare blend of stability and growth. For investors seeking a software name with a valuation safety net, PTC deserves a closer look—especially if the market's obsession with AI hype cools. As always, diversification is key, but PTC's fundamentals warrant a spot in the long-term portfolio.