Why 2024 could be Dassault Systems' year for investors

Dassault Systems (DSY) experienced a decline of more than 5% on Tuesday, July 5, following the release of second-quarter earnings forecasts that fell short of market expectations. The French corporation also revised its annual forecasts downward.

The company now aims for revenue growth between 6% and 8% (down from the previous target of 8% to 10%) and anticipates an increase in earnings per share (EPS) ranging from 8% to 11% (previously 10% to 12%).

DSY: French Leader in 3D Modeling and Technological Innovation

DSY is a French CAC 40 group specializing in the development of industrial 3D modeling softwares, as well as technology consulting and training services. Its operations primarily serve sectors such as aerospace, artificial intelligence, and healthcare. In 2023, the company achieved revenues of €5.951 billion.

This company, valued at over 45 billion euros, is 40% owned by the Dassault family, which maintains control and holds two seats on the company's board of directors. The stock is highly liquid, with 50% of its shares available for free float. The group operates in a B2B environment, catering to major corporations like Airbus, Safran, Hyundai, Peugeot, and the ITER project.

Slowed Growth and Future Challenges

Though a French company, DSY operates primarily in the United States, which contributes slightly over 50% of its overall activities. Europe follows with 29% of revenues, and then Asia with 18%. The company's revenue stream is largely concentrated, with 89% generated from software sales. These software revenues are split into 54% from industrial innovation, 24.1% from SMB innovation, and 21.6% from healthcare. The remaining 11% of activity, not related to software sales, comes from technology consulting. DSY has also strategically entered the artificial intelligence market through acquisitions such as PROXEM in 2020, a stake in Bloom in 2021, and involvement in the acquisition of Stylesage by Centric Software in 2022..

Until 2022, DSY maintained double-digit annual growth. However, growth moderated to 5% in 2023, with expectations now set between 6% and 8% for the current fiscal year.

This downward revision of forecasts is attributed to significant contract deferrals. Pascal Daloz, CEO of DSY, explained that "the signing of transactions was subject to a certain prudence" from clients, but all deferred contracts remained "under discussion for the coming quarters."
 

Financial Resilience Amid Slowing Growth

While this news is certainly not positive, it should be put into perspective. Although growth is slowing and clients are more cautious than before, the impact on net income is minimal. Net income is still expected to rise by 8 to 11% thanks to a constant improvement in margins. The net margin was approximately 16% in 2021, rising to 17.7% in 2023, and is projected to exceed 18% in 2024. This improvement reflects a strategic shift towards subscription and licensing models, now constituting 80% of software sales. Key drivers of this new model include 3DEXPERIENCE and Cloud activities, which reported respective growth rates of 29% and 6% in the first quarter of 2024.

Nevertheless, caution is warranted given DSY's high valuation, with a price-to-earnings ratio (P/E) near 40 despite a decline of over 21% since the beginning of the year. Such a valuation could be justified if growth was still as strong, but the recent slowdown tends to encourage caution. The company's earnings also have missed analysts' revenue forecasts in five of the last six quarters.

Investment Opportunity: DSY Stock at €30?

DSY stock has been down by 22.80% in 2024. Prices are currently testing the weekly support level at €33.70, established in late 2022 and retested several times since. There's potential for DSY to break lower in the coming weeks, possibly presenting an attractive investment opportunity near the 61.8% monthly Fibonacci support level of €29.50.This opportunity will, of course, be conditioned on a low-volatility and stable trading environment, without a burst of the tech bubble in the United States.

This support level could be critical if deferred contracts are finalized within the year, potentially triggering a V-shaped rebound. Should the Fibonacci support hold, institutional traders may target €67, representing a potential upside of +127%. Conversely, a definitive break below €28 would signal significant bearish sentiment for the stock.

DSY on monthly and meekly time frames. Source: xStation.

DSY is scheduled to release its definitive second-quarter results on July 25, expecting revenue of €1.495 billion, which would represent approximately 4% growth at constant exchange rates compared to the previous year.