Secret's Out: Buy This Hot Technology Stock Before Wall Street Catches On

Positioning and workflow technology company Trimble (TRMB -1.52%) has a bright future, but it's not the best-known or appreciated company. There are various reasons for this, but enterprising investors willing to dig deeper into the stock could generate exceptional returns. Here's what you need to know before buying in.

Trimble isn't a consumer-facing business

You may have encountered Trimble's hardware and software solutions if you work in the construction, transportation, agriculture, or mapping industries. For those who don't know the company, its origins lie in precise positioning hardware, but its future lies in increasing its software and services solution to customers.

Instead of merely offering positioning and sensing technology, Trimble's software and services help customers plan and model their operations (think trucking fleets planning routes) and analyze and optimize daily operations (think complex construction sites where something changes every day).

This knowledge and understanding that its software/recurring revenue comes with higher margins and is becoming an increasingly important part of its customers' daily workflow make it much easier to understand the company's underlying growth prospects.

Annualized recurring revenue and cash flow, not revenue and earnings

Trimble's annualized recurring revenue (ARR) and cash flow generation are better ways to understand the company's growth path than purely looking at revenue and earnings. Management defines its ARR as "the estimated annualized value of recurring revenue." It includes its subscription and maintenance in a quarter and the contract value of licenses in the quarter and then annualizes that figure.

Image source: Getty Images.

As such, it gives an excellent picture of Trimble's business evolution rather than just looking at upfront revenue and earnings on Trimble's income statement.

The difference is demonstrated below in the table showing Trimble's guidance for 2024. Mid-single-digit organic revenue growth is good enough, but note that Trimble's ARR is growing at a low-double-digit rate.

Data source: Trimble presentations.

ARR is also a better guide toward what kind of free cash flow (FCF) Trimble can generate in the future. This is shown by looking at the Wall Street analyst consensus for revenue, earnings before interest, taxation, depreciation, and amortization (EBITDA) growth. You don't have to take these figures as gospel, but they serve to illustrate how underlying ARR growth leads to increased FCF generation over time.

The consensus is for $500 million in FCF in 2024, $648 million in 2025, and $869 million in 2026. To put these figures into context, based on the current market cap of $13.7 billion, Trimble would trade on 15.8 times FCF in 2026. While that's a couple of years away, the company's ARR growth remains strong, and the increase in margins and cash flow from growing its software and recurring revenue ensures increased FCF conversion.

You won't see all this if you focus purely on Trimble's revenue growth.

Data source: marketscreener.com. EBITDA = earnings before interest, taxation, depreciation, and amortization.

Trimble's outstanding audit issue

Another reason Trimble may well fall under the radar of being a "buy" by many investors is caution over the issue of an audit of its 2023 financial results by EY. This was disclosed in May, and at the time, Trimble's treasurer, Phil Sawarynski, said, "Neither EY nor Trimble had sufficient documentation related to certain IT and other controls for revenue-related systems and processes." CFO David Barnes noted, "This is just about the internal controls. No issues with our numbers have been identified by EY or us."

CEO Rob Painter reiterated this position in August, and he expects EY's re-audit to be complete in a month or so. While there's still an element of risk involved, so far, nothing suggests it will have any financial impact on Trimble.

Image source: Getty Images.

A stock to buy

Trimble's 11%-13% expected ARR growth in 2024 is all the more impressive considering one of its end markets (freight transportation) is in recessionary conditions. It demonstrates the importance of its solutions to improving its customers' daily workflow and the long-run potential for growth.

All told, the stock is an attractive buy for investors looking to buy a stock before the rest of the market catches on. The company is doing very well in a difficult environment, and its FCF is set to significantly improve in the coming years, making the current valuation look very appealing.