Bentley Systems Earnings: Q3 Beat as E365 Subscription Mix Grows; Shares Overvalued

Bentley Systems BSY is a moaty engineering software firm that has solid growth opportunities ahead, in our view. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has expanded its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their markets remain underpenetrated—like digital twin deployment. In addition to its platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue. These factors combined have us confident Bentley can achieve top-line growth over 10% over the next five years, with margin expansion in tow.

With such growth in mind, we think Bentley’s existing revenue streams are well safeguarded thanks to strong switching costs, in our view, that merit a narrow moat rating for the firm. We think switching costs are derived from three key areas persistent across Bentley’s software: a steep learning curve, severe risks if the software is used improperly, and the costly and lengthy integration required. These switching costs are evidenced by the company’s sound net revenue retention rate of 110%.

Altogether, while we think Bentley is currently in a solid position competitively, we think that the firm is at risk of long-term movements made by large players like Autodesk that could more aggressively encroach its territory with the help of its close neighbor offerings like Civil 3D. While we have yet to see any such evidence yet, we still consider this a real possibility, which is why we assign Bentley a narrow moat rating rather than a wide moat rating.