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Bentley: This Narrow-Moat CAD Vendor Has Potential in Its Platforms, Though Shares Are Overvalued

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We have initiated coverage on Bentley Systems BSY with a $42 fair value estimate and a narrow moat rating. 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 elevated the makeup of its offerings by expanding 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 respective markets remain underpenetrated—like digital twin deployment. In addition to its newer 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 that Bentley can achieve top-line growth over 10% over the next five years, with margin expansion in tow. That said, we think the market is overvaluing the stock by overestimating the pace of adoption of new technologies like digital twins and the pace of margin expansion. In addition to the still-hearty growth we bake in, 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%.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Bhusal Sharma

Equity Analyst
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Julie Bhusal Sharma is an equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She covers technology, media, and telecommunications companies.

Before joining Morningstar in 2017, Bhusal Sharma freelanced for the Chicago Tribune, writing about tech and startups. She also was acting associate editor for Columbus CEO, and her column for that magazine won the Alliance of Area Business Publishers’ national award for “Best Recurring Feature” in 2017.

Bhusal Sharma holds a bachelor’s degree in philosophy with a minor in mathematics from Kenyon College.

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