Trimble Stock – Farming, Construction, and Supply Chains

When deciding which disruptive tech stocks to invest in, you could take what they call “a top-down approach.” For example, you might rustle up a list of the most technologically backward industries, find the ones that score the worst, then invest in companies building technologies for said industries. Check out this table from McKinsey which shows the five least digitized industries across the globe:

We recently wrote about a company called Procore that’s building a digital transformation platform for the construction industry. We passed on the stock because while it’s a huge total addressable market (TAM), there are plenty of established software vendors dabbling in it, one of those being a company called Trimble (TRMB).

About Trimble

We first came across this $19.5 billion company while researching the ARK Space ETF which currently holds Trimble as its largest position.

The relevance to the space thesis is that Trimble stands to benefit from the increasing pervasiveness of wireless connectivity which will soon be available anywhere on this planet. Roughly speaking, Trimble can be split into the following three segments (names used in financial filings in parenthesis, % of overall revenues in brackets):

• Connected construction (Buildings and Infrastructure) [39%]
• Connected farm (Resources and Utilities) [20%]
• Connected supply chain (Transportation) [20%]

There’s also a “Geospatial” segment accounting for 21% of revenues that enables the other segments and also supports ARK’s decision to add this stock as their biggest space-related holding (we’re classifying the stock under our Internet of Things category).

Trimble focuses on “large markets historically underserved by technology,” which is exactly what we’re looking for according to the aforementioned “top-down thesis approach.” Researching large companies becomes very complex very quickly, so we like to keep things simple and make sure revenue growth is up to snuff.

Trimble’s Revenue Growth

Industries are often cyclical across years or even decades, some booming, some busting, at any given time. When a company like Trimble operates across multiple major industries, there’s a smoothing effect that happens to revenues. This reduction in volatility results in lower growth rates across the entire company. Geographical diversification helps smooth things too, and Trimble’s breakdown is as follows:

• North America (52%)
• Europe (29%)
• Asia Pacific (13%)
• Rest of the world (6%)

No single customer accounts for more than 10% of Trimble’s revenues. The end result is an 8.4% compound annual growth rate (CAGR) over the past 15 years.

That’s not the double-digit growth we prefer, but it’s understandable given how diversified these revenue streams are. To see the smoothing process in effect, just look at this great slide Trimble produces during quarterly earnings results that shows how each segment contracts or expands based on what’s happening in each industry.

The changes in the second column are “year over year,” which means they’re Q1-2021 compared to Q1-2020, which is about when The Rona hit. It’s not surprising to see double-digit growth last quarter across the entire company in aggregate, as the economy has rebounded and then some. In parenthesis, the second column shows us organic growth, growth from foreign exchange impact (FX), and impact from mergers & acquisitions (M&A).

These are great insights to have since we don’t often see companies provide this level of granularity. The accompanying notes for each quarterly earnings call help explain the reasons why things are growing or slowing. Overall, it’s a pretty easy business to understand and follow as an investor, especially considering how complex the underlying products and services are. Trimble says to expect high single-digit growth for 2021, which is right in line with what they’ve been doing over the past 15 years. Consistency is good.

Hardware vs. Recurring Revenue

Trimble further segments revenues by type:

• Recurring – Subscription terms that generally range from month-to-month to three years.
• Software & Services – Software includes perpetual and term licenses. Professional services are not complex, can be provided by other vendors. Maintenance and support billed over a term of typically one year.
• Hardware – What it says on the tin

For clients of Trimble, we would assume cancelling a contract is more difficult than ceasing hardware purchases. That’s why we value software-as-a–service (SaaS) revenues over hardware revenues – the market assigns SaaS business models a premium for a reason. Here’s how Trimble’s revenues are broken down across all segments:

Ideally, we’d like to see “Recurring” become the majority revenue stream across all business lines. Trimble says they’re moving towards “a more significant mix of software, recurring revenue, and services.” Unless they move to recurring only, they’ll have a tough time trying to use the SaaS metrics we’ve all become familiar with that help us understand any business very quickly.

The Dangers of DEI

There’s one last tidbit we found buried in the latest Trimble 10-K. Unfortunately, the company decided to play politics last year and hired a Vice President of Diversity, Equity, and Inclusion. This is a big red flag for investors. Says the company:

We aim to transform and re-invent the way Trimble attracts and hires employees to increase diversity.

Every competent hiring manager knows how lethal it is to a high-performing team when you start making hiring decisions based on criteria other than competency, both to the person being patronized and degraded by such a practice, and to your current employees who know very well what competency looks like. We do not invest in companies that use any criteria other than competency when hiring because they are going against their fiduciary duty and harming their shareholders. Let’s hope Trimble quickly realizes this and gets back to focusing on what matters – adding value for their shareholders.

To Buy or Not to Buy

We’re not actively looking for new stocks to buy given our outlook on 2021. If we were, Trimble presents a very compelling thesis with their focus on “large markets historically underserved by technology” which is where you’re likely to find large blue ocean TAMs. With construction being the largest segment for Trimble at nearly 40%, they’re exposed to economic downturns in much the same way Procore is, just to a much lesser extent. We’d like to see recurring revenue account for at least half of their revenues as opposed to 37% today.

When it comes to valuation, we don’t think the ARK effect has had any impact on this stock given their one-year return is about the same as the Nasdaq – +140%. Our simple valuation ratio shows Trimble is not richly priced at all when compared to all the other stocks in our universe (annual subscribers can see ratios calculated for ~60 tech stocks in our catalog of more than 300 tech stocks).

• Market Cap (19.5 billion) / Annualized Revenues (3.546 billion) = 5.5

We’re adding Trimble to our stock catalog with a like. As for purchasing the stock, we don’t have any agtech exposure at the moment, and we’re looking for some (we like Farmer’s Edge but they’re just too small right now). We hardly have any exposure to space stocks, so the “Geospatial” segment is compelling as well. It all comes down to making a decision and pulling the trigger. If you’re a Nanalyze Premium annual subscriber, you’ll be the first to know if we convert Trimble from a “like” to a “love.”

Conclusion

We always preach about the importance of diversification, but it’s a double-edged sword. The more diversified a company is, the more growth will be tamed. That’s not a good or a bad thing, that’s just how it is. We like Trimble’s approach to investing in industries underserved by technology, but would like to see recurring revenue become a much bigger part of their business, something the company is slowly striving towards.