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Bull of the Day: AspenTech (AZPN)

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Aspen Technology (AZPN - Free Report) , aka AspenTech, is a $15 billion provider of industrial software that helps manufacturers and engineering firms monitor and optimize their operations in a process commonly referred to as asset performance management (APM).

Their most recent quarterly report on October 26 blew away all expectations with a 75%+ beat on the bottom line EPS. But the stock fell from all-time highs above $260 to $235 on Thursday as lots of technology got slammed after weak reports from Amazon (AMZN - Free Report) and META Platforms (META - Free Report) shook the sector.

AZPN was already a Zacks #1 Rank headed into the quarter as analysts were raising estimates on new deals, partnerships, and customers.

And they will be submitting new upward revisions this week as they digest the report and re-calibrate their models.

AZPN Quarter Details

AspenTech reported first-quarter fiscal 2023 non-GAAP earnings of $2.20 per share, beating the Zacks Consensus Estimate of $1.23. The company reported non-GAAP earnings of 31 cents per share in the year-ago quarter.

Revenues of $250.8 million surpassed the Zacks Consensus Estimate by 10.3%. The company reported revenues of $77 million in the year-ago quarter.

The top-line performance was driven by the acquisition of Emerson’s business units. The integration of Emerson's OSI and GSS businesses with Aspen will aid the the company to move toward its token licensing model.

AZPN Analyst Reaction

KeyBanc analyst Jason Celino raised the firm's price target on Aspen Technology to $280 from $270 to reflect his growing confidence in acceleration opportunities, and how the company has executed on multiple fronts regarding its integration plans with DGM and SSE

Celino noted that AspenTech posted slightly better Q1 ACV growth of 7.7%, though heritage annual spend growth came in modestly below. "The company continues to see positive demand trends across its business, though remains vigilant on macro, and is reiterating its full year 2023 ACV growth guidance of 10.5%-13.5%."

Celino has been a diligent and accurate bull on AZPN for several years as we'll see coming up. It's worth noting that he hiked his outlook and PT from $227 to $270 just a week ago ahead of earnings.

And here was his move in July as AZPN was about to acquire significant Oil & Gas asset technology and contracts from Emerson Electric (EMR), which acquired 55% of the company in May...

KeyBanc analyst Jason Celino raised the firm's price target on Aspen Technology to $210 from $175. The analyst believes Aspen is positioned to "see a multi-quarter acceleration back to double-digit annual spend growth, which is supported by a strong oil and gas end market backdrop."

Celino added that, with the transaction with Emerson now behind it, he rolls forward the firm's model to FY24 for the combined company, with a higher price target of $210 based on 30x FY24 enterprise value/free cash flow and a bull case price target of $235 based on 32x FY24.

What is APM and Why Does It Matter?

AspenTech solutions aid in optimizing process manufacturing by supporting real-time decision making, predicting equipment failure, and providing the ability to forecast and simulate potential actions.

Asset management solutions not only assist manufacturers in understanding the operating conditions of their assets but also to take appropriate actions to increase their productivity in an efficient way.

In the era of automation and artificial intelligence (AI), AspenTech talks of the "self-optimizing plant" that can use Industrial AI technology to enable companies to make plants increasingly autonomous and optimize across functions.

For more on AI in the latest industrial developments, see my recent Zacks Confidential report on the primary architect of Industrial AI, NVIDIA (NVDA - Free Report) ...

Omniverse is the Engine for the Metaverse

You can request a copy by contacting Ultimate@Zacks.com -- and tell them Cooker sent you!

Old School Modeling Gets AI Facelift

Here's what I wrote in my 2020 article...

AspenTech is the oldest industrial software company you've never heard of. They got their start over four decades ago modeling chemical processes for oil and gas companies during the energy crisis that began in the 1970s.

As their PR video says "Not long after that, we started moving companies away from the dials and knobs and kicked off a digital revolution in the process industries."

AspenTech was put on my radar not merely because of its frequent visits to the upper realms of the Zacks Rank earnings momentum model, but also because of a significant AI acquisition they made almost four years ago. Here was the press release...

AspenTech Acquires Mtell
October 27, 2016

Will Add Predictive and Prescriptive Maintenance Technology to aspenONE® Software; Extends Company’s Asset Optimization Offerings
Bedford, MA -

Aspen Technology, Inc. (NASDAQ: AZPN), a leading provider of software and services to the process industries, announced it has acquired Mtelligence Corporation (known as Mtell), a San Diego, California-based pioneer in the field of predictive and prescriptive maintenance for asset performance optimization.

Mtell products enable companies to increase asset utilization and avoid unplanned downtime by accurately predicting when equipment failures will occur, understanding why they will occur, and prescribing what to do to avoid the failure.

The products provide a low-touch, rapidly deployable, end-to-end solution that combines a deep understanding of operations and maintenance processes, real-time and historical equipment data and cutting-edge machine learning technologies. As a result, customers can:

Monitor the health of equipment, detect early failure symptoms, diagnose their root-cause and recommend the best responses to avoid the failure

Continually learn and automatically adapt to changing equipment and process behaviors

Automatically share findings across a network of similar equipment to improve the overall process performance.

Some of the world’s largest process manufacturing companies use Mtell software to detect and avoid failures well in advance of an actual breakdown, optimizing the performance of their assets. Customer results have shown significant benefits including improved industrial safety, removal of risk, reduced failures, enhanced productivity and increased profitability.

The AI Brains Behind Mtell

The co-founder of Mtell was Alex Bates who performed DARPA-funded research in neural networks as an undergrad, as well as research in memory and computational diagnostics. Next he jumped into the private sector, applying analytics on some of the world’s largest data warehouses at Teradata, a pioneer in big data / MPP database technology.

A lead inventor on 3 patents in the area of sensor networks and machine learning, in 2006 Bates co-founded Mtelligence (Mtell) to harness the deluge of sensor data in the industrial IoT, with a mission to create a world that doesn’t break down. Mtell’s machine learning platform is used to monitor global fleets of offshore drilling rigs, railroad engines, and process equipment, in effect creating a distributed immune system to protect equipment and personnel.

The AspenTech website describes a case study where Mtell technology examined pump and compressor assets for a major oil & gas refinery with hundreds of sensors in play at once. Aspen Mtell analyzed 220 million sensor values to identify the top 10 maintenance cost failures and predicted a compressor breakdown 49 days in advance.

This is similar to what Alteryx (AYX) allowed Royal Dutch Shell to do, helping them create predictive analytics for forecasting asset failures on off-shore drilling rigs.

Here's how AspenTech describes the evolution of Industrial AI for modern asset performance management...

Traditional preventive maintenance alone cannot solve the problems of unexpected breakdowns. With asset performance management powered by low-touch machine learning, it’s now possible to extract value from decades of process, asset and maintenance data to optimize asset performance.

Since Bates was clearly ahead of the curve with machine learning, I'm eager to learn more from him and currently reading his book Augmented Mind: AI, Humans, and the Superhuman Revolution that he published in 2019 through his investment and research firm Neocortex Ventures.

Big Beat & Raise Quarter

Clearly, the downturn in oil and gas markets impacted AspenTech business and the company had to lower expectations in their Q3 report in May 2020. But you'd never know it looking at what just happened, causing shares to jump from $98 to $128 this month.

KeyBanc analyst Celino wrote "While the downturn in oil end markets presented near-term headwinds, we are confident in the company's best in class execution and more durable business model."

And so after his thesis about AZPN was confirmed in the June quarter, Celino felt compelled to raise his outlook again. On August 13, he raised his price target on AZPN to $137 from $120. Most impressive to him was the 6%-9% 2021 annual spend guidance, which was much higher than his previewed expectations of 3%-5% year-over-year growth. Celino also pointed out that despite a tough end market backdrop, the company's continued execution reinforces his long-term confidence that Aspen remains a core name to own.

While that spend metric is important to the KeyBanc analyst, I'm more focused on the company growth in a total addressable market for big data and machine learning analytics in the tens of billions. AZPN's projected surge of 23.5% in revenues to $729 million this fiscal year will exceed the last TTM peak of $618M by 18%.

And the 37% expected jump in profits is just icing on that Industrial AI cake. While the valuation at nearly 12X sales is rich, I would look to be a long-term buyer on pullbacks under $120.

(end of my 2020 research notes)

Bottom line: Buy AZPM on this pullback. And follow Celino and Cooker to keep up with latest developments in AI/ML and "deep learning" automation technologies from NVIDIA (NVDA - Free Report) and others.

Disclosure: I own shares of NVDA and Alteryx competitor Splunk in the data "mining and modeling" space for the Zacks TAZR Trader portfolio.

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