Cathie Wood's flagship exchange-traded fund (ETF), the ARK Innovation ETF, hit a 52-week high on Dec. 20 as investor sentiment has turned favorable for many of the fund's ultra-growth holdings.
However, ARK Invest has many other interesting funds, and some of their holdings still look like good bargains.
For example, Trimble (TRMB 1.59%), which provides positioning and workflow technology (among many other things), is the second-largest holding in the ARK Space Exploration & Innovation ETF and the fourth-largest holding in the ARK Autonomous Technology & Robotics ETF.
Here's why Trimble blends growth and value as a balanced buy for 2024.
Image source: Getty Images.
A primer on Trimble
Trimble is one of those companies you may have never heard of since its customers are primarily other businesses, not consumers like you and me. But its solutions play pivotal and growing roles in industries all around us.
The company's expertise lies in connecting the physical world with the digital world. A good example is its work in agriculture.
On the hardware side, Trimble makes displays, guidance controls, steering systems, flow and application controls, and solutions for water monitoring, distribution, and drainage. On the software side, it can manage information across devices, set up field tasks and field manager tools for easier workflows, and integrate with other third-party solutions like those from farm equipment makers John Deere and Case. That way, Trimble isn't directly competing with original equipment manufacturers, but rather, working with them. This is key since many of those manufacturers are developing their own digital solutions to enhance the performance of their equipment and set up additional revenue streams.
Another good example is the Trimble Business Center for civil construction. The platform allows the import and management of files, building models, data analysis, and other tools that help with the construction planning process. The platform assists with cost calculations for better project management.
The sales funnel for a typical Trimble customer begins with hardware and then pivots to a recurring revenue stream from software. But not long ago, Trimble relied far more on hardware and product sales.
A balanced business
Looking at Trimble's performance in the first three quarters of 2023, 47.8% of revenue came from hardware and perpetual software, 48.4% from subscription and recurring services, and 3.8% from professional services. That's a big shift away from hardware and toward recurring revenue in a short period. For example, hardware and perpetual software made up 58.3% of revenue in 2021 and 54% of revenue in 2022.
The business is also geographically diverse. During the first nine months of the year, 53.2% of its revenue came from North America, 39.5% from Europe and Asia Pacific, and the rest from other regions.
Trimble solutions cover various industries, including agriculture, construction, geospatial, government, infrastructure, natural resources, transportation, and utilities. However, it breaks down its business segments into four categories. Buildings and infrastructure (which includes construction) is the biggest -- in the first three quarters of the year, it generated 42% of Trimble's revenue. Geospatial brought in 18.4%, resources and utilities accounted for 20.6%, and transportation booked 19%.
Trimble's slowdown
Trimble hasn't had a great year, mainly due to slowing product revenue growth. The following chart gives a good picture of where the company has been and where it could be headed.
TRMB Revenue (TTM) data by YCharts.
As you can see, over the longer term, margins have expanded nicely thanks to a more software-orientated business. Revenue has also been growing at a breakneck pace. But both margins and revenue growth have cooled off or even decreased over the last year or two.
The slowdown makes sense. Trimble's business is sensitive to interest rates. A lot of its sales growth is dependent on companies investing in growth and changing the way they operate. When management teams get defensive, they are more concerned with cutting costs and maintaining operations. Even if Trimble's solutions could save a company money over time, it's easier for it to make sales in a good economy.
Trimble is well positioned to turn things around, but it could take time. The company said that economic conditions worsened in the third quarter and could remain weak for the rest of the year and the beginning of 2024. However, it did lower its expenses in response to lower sales, which should help protect its earnings and margins.
In sum, the short-term slowdown it has been experiencing isn't that bad, and its path to recovery is straightforward.
Give Trimble time to recover
Trimble is a well-run business, and a bold bet on productivity, quality, safety, and environmental sustainability. Despite its shift toward recurring revenue, the company should remain cyclical and sensitive to market cycles.
Trimble is the kind of investment that should do well over the long term. But it could remain volatile in 2024. Further sell-offs would create even better buying opportunities. But even now, the stock looks like a well-rounded buy with a forward-price-to-earnings ratio under 20.
