Time to Buy This Cathie Wood Tech Stock on a Dip

Cathie Wood is a fan of workflow technology company Trimble (TRMB 0.32%), a top 10 holding in her ARK Autonomous Technology & Robotics exchange-traded fund (ETF) and her ARK Space Exploration & Innovation ETF. Wood, a growth-focused investor, has good reason to like it because Trimble's combination of growth prospects in the construction, infrastructure, and agricultural industries and its transformational workflow software solutions for these stoic industries makes it a highly attractive stock to buy.

Why Trimble's stock dipped recently

The company's stock weakened after the release of its first-quarter earnings, but it had nothing to do with the earnings themselves or management's guidance for the rest of the year. The earnings beat guidance and market expectations, and management reaffirmed its full-year guidance.

Instead, investors appear to have reacted negatively to a financial controls issue, which is delaying the release of a first-quarter Securities and Exchange Commission (SEC) filing and the issuance of an amended annual 2023 filing.

Chief financial officer Phil Sawarynski said on the earnings call that the Public Company Accounting Oversight Board -- the nonprofit that reviews audits of publicly traded companies -- selected the 2023 audit of Trimble by EY (the trade name of the British "big four" accounting firm Ernst & Young) as part of an inspection of EY's work. Sawarynski said that during preparation for the oversight board's review, the British firm concluded "that neither EY nor Trimble had sufficient documentation related to certain IT and other controls for revenue-related systems and processes."

Sawarynski's predecessor, David Barnes (who retired this month), pointed out on the earnings call that the support of Trimble's financial figures by EY "is unchanged" and that EY was going through "enhanced audit procedures to confirm the numbers."

Such considerations are always a concern, and, understandably, some investors might shy away from buying the stock until the SEC filings are received upon completion of EY's procedures. Still, as Barnes noted, there's no reason to believe Trimble's numbers will change at this stage.

Attractive figures

That's good news because its underlying metrics make it a very attractive stock. The company's origins lie in positioning hardware technology (site survey equipment, for example). Still, it's becoming an increasingly more significant part of its customers' daily workflow through its connect & scale strategy, which connects data and workflows to give customers real-time visibility into their business.

Image source: Getty Images.

This shift to software and subscription services means the best way to monitor the company is through its annual recurring revenue (ARR) and free cash flow (FCF) rather than its revenue and earnings. Shifting from hardware licensing revenue to subscription revenue implies a shift in revenue recognition as the former is recognized up front, while the latter is recognized over many years.

As you can see below, Trimble's ARR is growing at a low-teens rate and is only starting to drop down into its FCF. If you insist on valuing Trimble on conventional metrics and earnings per share (EPS), the stock trades at 21.3 times the midpoint of earnings guidance. That might seem expensive for a company growing revenue by 4% to 7%, with EPS growing non-GAAP EPS from $2.66 in 2023 to just $2.60 to $2.80 in 2024.

On the other hand, management's FCF guidance for 2024 is roughly 1x its income after adjusting for deal expenses and an extra week, putting it on a market cap of 21.3 FCF for 2024. That's an excellent valuation for a company growing ARR at its current rate. Moreover, Wall Street analysts have ARR increasingly dropping down into FCF, growing the latter by nearly 16% annually to 2026.

Data source: Trimble. *Excluding the agriculture joint venture.

Trimble's business is improving

Investors can have confidence in Trimble's numbers because of the ongoing strength of its architects, engineers, construction, and owners (AECO) segment. Trimble's Construction One (TC1) helps customers design and manage projects using real-time data. Management sees it as a framework within which it can sell new solutions. Indeed, CEO Rob Painter said that two-thirds of the growth in AECO in the quarter came from "existing logos," demonstrating Trimble's ability to grow even in difficult trading environments.

Data source: Trimble.

There was also some good news in the transportation and logistics segment, as Trimble began successfully selling solutions from Transporeon (a European acquisition made in 2023) to North American customers, even as the global transportation market weakened.

A stock to buy

Trimble's valuation is favorable, and its growth trends are impressive enough. Given some improvement in the global economy, they will look even better, and the increase in higher-margin software and subscription sales will improve the FCF margin over the long term. It makes Trimble a stock to buy if you can tolerate uncertainty around the financial controls issue.