Let's start with a little stockmarket history. In Europe, to prevent investors from getting too lost amongst Microsoft, Apple, Palantir, AMD, Datadog, AppLovin, and others, the size of the technology sector has been reduced to a bare minimum. In the world of big caps, this commendable effort at simplification has resulted in a limited choice: SAP SE and/or Dassault Systèmes and/or ASML. For good measure, as it was also possible to look to the periphery, with STMicroelectronics or Infineon, or even one tier below with Amadeus, Soitec, Nemetschek, and some others. Indeed, some adventurers even tried to convince people that Nokia and Ericsson were going to become intercontinental stockmarket stars.
But anyway, in the pure software sector, European investors focused on very large companies had no choice but to choose between SAP SE and Dassault Systèmes, a bit like choosing between the Beatles and the Stones, or, to dust off the references a little, Kendrick Lamar and Drake. Those who chose to bet on Dassault Systèmes between 2009 and 2021 had no reason to complain*. The stock rose 23-fold and even outperformed some leading US indices. The figures speak for themselves: 12 years of growth in 13 years and 8 out of 13 times on the top step of the podium ahead of SAP SE and the S&P 500. The share price rose from €2.45 at the height of the subprime crisis to €56.82 on a Friday in November 2021 (including the effect of two splits along the way).
When you ask AI to model a lambda modeling tool...
From the Mirage to the Twingo
Dassault Systèmes (DSY) is French Tech at its most serious: engineering software, digital twins, Industry 4.0, and the world leader in design (CAD) and product lifecycle management (PLM) solutions. It was founded in the same year as Ulysse 31 and Tonton à l'Elysée. Developed at Dassault Aviation to design jets by simulating all the stresses (mechanical, vibratory, thermal, etc.) that the assembled materials and parts will have to withstand. It is the flagship solution for aerospace and automotive design software. Significant barriers to entry because industrial customers are reluctant to change solutions every five minutes for reasons of cost, training, safety, and production continuity. Less accessible, more efficient, and more expensive than competing tools. Dassault Systèmes is also a company that has long outperformed expectations and raised its targets left and right.
The enthusiasm was such that not so long ago, investors were willing to pay 50 or 60 times the expected results for the following year, roughly four times more than for any European stock. DSY's average P/E ratio is 56 over 10 years, higher than that of Hermès.
That was then. Because the share is currently trading at around EUR 28, which is almost exactly 50% lower than in 2021. Halved, for those who are not good at math. What happened?
And above all, health!
Let's go back to 2019. At the time, the group was on a roll. Management wanted to diversify its operations outside traditional cyclical sectors to seek growth elsewhere. The answer was healthcare, with Medidata, a US-listed company that had developed software for managing clinical trials. This promising new addition was added to the group's portfolio for $5.8 billion at the end of 2019. The transaction was finalized just before the COVID-19 pandemic. With its new "health" badge, Dassault Systèmes is benefiting from a surge in enthusiasm that will take its share price to new heights two years later, with the promise of a digital clone of the human body that could function as the digital clone of a production line. Obviously, it's so sexy that the market has taken the bait.
Unfortunately, success was not forthcoming. Post-COVID, Medidata suffered the same backlash as its customers. The initial objectives were quickly abandoned and growth slowed. This was a big disappointment for investors, especially since the healthcare business now accounts for just over 20% of the group's revenue and was supposed to take over the role of growth driver that the other divisions had gradually abandoned. Since last year, Medidata has even seen its growth stall. With the automotive sector (which accounts for nearly a quarter of Dassault Systèmes' annual revenue) also struggling in Europe, the clouds gathered and eventually turned into disappointing financial results and downward revisions of targets (or "delays," to put it politely).
Adding to the current concerns is the issue of governance, which did not bother many people as long as the company was performing well, but has become a major criticism since the share price derailed. The influence of the Dassault family and the lack of diversity on the board of directors are regularly criticized. Finally, there is a shadow of doubt hanging over the sector's compatibility with AI, or rather its ability to resist it. For the time being, the barriers to entry are still very high: it's one thing to create cute starter packs with ChatGPT, but there's a world of difference between that and embarking on a Boeing manufactured entirely with Grok.
But beyond all these minor annoyances, the key to justifying valuations 50 times higher than earnings is growth. The revision table available here shows that the company's momentum has evaporated and continues to deteriorate. If there is a silver lining, it would be to cross-reference these forecasts with the stock's plunge: the stock is now trading at 30 times expected year-end earnings and 26.5 times those for 2026. This is unheard of in years and is well below competitors such as Autodesk and PTC (which have recently discussed a merger). Is this enough to reawaken the libido of those who are capable of catching a falling knife without cutting their hands?
