Changes In Environmental Legislation And Economic Reopening Will Boost Aspen Technology’s Prospects

As the global economy picks up in the coming year, Aspen Technology, Inc. (AZPN) is anticipating a return to pre-pandemic growth and profitability. The company is guiding for 24% revenue growth in FY’21, significantly better than the flat performance achieved in FY’20.

Management stated during the latest earnings call, “Our demand generation and top of sales funnel business activity are performing at levels similar to what we experienced prior to the onset of COVID. We believe this is a positive indication about the opportunity for strong growth in the second half of fiscal 2021 and beyond.”

In addition to anticipated strong revenue growth, Aspen Technology is also extremely profitable. The company’s free cash flow margin is 39%. In other words, every dollar in revenue results in 39 cents of free cash flowing into the company.

Global Leader In Asset Optimization

Aspen Technology is recognized as the global leader in industrial asset optimization, with many years of process modeling, Big Data and analytics experience applied to the industrial manufacturing market. The company provides software solutions to more than 2,300 companies, including many of the largest energy, mining, and chemical names.

What’s more, AZPN is adding artificial intelligence into every phase of manufacturing, from the initial plant design/layout through day-to-day production. It recently acquired OptiPlant, a company that specializes in 3D visualization and optimization software used for manufacturing plant layouts, while providing the means for things like optimal pipe routing and environmental performance.

Most of Aspen Technology’s customers will have expanded IT budgets this year as the world begins to emerge from the pandemic. Additionally, its industrial customers are likely to spend more IT dollars on process optimization and keeping equipment running. For large capital intense businesses, even a 1% improvement in efficiency can translate to millions of dollars of savings, particularly in cases where machinery is operated 24/7.

ESG And Climate Change

It should also be noted that President Biden is expected to tighten up the environmental regulations that were slashed by the previous administration. Aspen Technology should benefit from green legislation as the company’s applications provide the means for businesses to reduce their environmental footprints by maximizing efficiency.

Stock Chart

Aspen Technology has not gone unnoticed by investors, as the stock has appreciated by 62% in the past year.

That said, one detraction from an otherwise attractive investment opportunity is the frothy valuation. Looking at the price/sales ratio, it lands at 15.3, a high-end figure that is reserved for high-growth companies.

Wall Street’s Take

From Wall Street analysts, Aspen Technology earns a Moderate Buy consensus rating, based on 3 Buys and 1 Sell. Additionally, the average analyst price target of $156.33 puts the upside potential at 2%. (See Aspen Technology stock analysis on TipRanks)

Summary And Conclusions

While Aspen Technology delivered an anemic performance in 2020, that is expected to change this year as the world emerges from the pandemic. The company provides process optimization solutions for some of the largest industrial corporations in the world, in areas that will thrive such as oil and gas, mining, and chemicals.

The company’s management team is guiding for a strong FY’21, with 24% revenue growth and strong free cash flow margin in excess of 35%. The only negative for this name is the high price/sales ratio of 15.3, a little frothy for a fairly mature company.

Disclosure: On the date of publication, Steve Auger did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.