By OSCAR MACKERETH
Two new investments were made in the quarter (Q1 2025), IDEXX Laboratories and Dassault Systèmes, which is detailed below.
New holding Dassault Systèmes provides an extensive digital framework to design, simulate, and optimise products, systems, and processes prior to physical implementation. Essentially, the company facilitates the creation of virtual replicas of real-world assets, enabling collaborative experimentation, risk-free scenario testing, and data-driven decision-making. Its products have estimable application, being involved in every Electric Vehicle development worldwide, two thirds of microchips and half of all drug and medical device developments.
The global business landscape has experienced a significant transformation in product development strategies over the past decade, characterised by an acceleration in release cycles across various industries. Organisations are increasingly prioritising rapid, iterative product launches over prolonged development phases. This shift is driven by several factors, including heightened competition, the democratisation of distribution via digital platforms, and advancements in progressive design methodologies.
This trend is particularly pronounced in the automotive sector, where competition from Chinese mobility startups has posed substantial challenges for European and American original equipment manufacturers. Following years of sacrificing profitability for extensive research and development investment, these Chinese startups have achieved considerable technological advantages in powertrain and energy storage technologies, as well as software integrations. Current analyses indicate that these innovative mobility companies incur less than one-third of the development costs of traditional OEMs while managing to bring products to market approximately 80% faster.
Similar trends are observable in the pharmaceutical industry. The approaching patent cliff and the increasing prevalence of generic medications have prompted pharmaceutical companies to outsource substantial levels of research and development. Personalised medicine also illustrates a shift in value from large-scale products towards targeted treatments. In the retail sector, e-commerce is anticipated to account for approximately 20% of total retail sales this year[1], with projections indicating it could reach around 40% by 2027[2]. Platforms such as Amazon have lowered entry barriers, enabling small and medium-sized enterprises to compete alongside global brands, thereby diminishing the competitive advantage previously held by extensive distribution networks, which were once the primary strengths of global FMCG majors. For instance, in H1FY24, the top 50 global CPGs by revenue only posted 1.2% YoY revenue growth, whilst in North America ‘insurgent brands’ accounted for roughly 40% of total market growth[3].
Figure 1: Bain & Company
The rise of social commerce and direct-to-consumer models has further transformed product discovery, with platforms like Instagram and TikTok playing pivotal roles. Currently, over 80% of young consumers are influenced to make purchases through social media[4], leading retailers to prioritise social commerce and rapid product innovations to retain[5] the ‘mind share’ of younger demographics in the evolving ‘attention economy.’
In recognition of this evolving landscape, the Global Leaders portfolio has a distinct preference for businesses which occupy nodal B2B positions with favourable leverage into complex B2C end markets. Instead of competing in ‘winner takes most’ markets with accelerating product cycles, these Leader companies providing efficiency for their end markets stand to benefit from the global drive towards complexity. Examples of such portfolio holdings include IQVIA Holdings in pharmaceutical R&D, Ansys (soon to merge with Synopsys) in semiconductor R&D, IDEXX Laboratories in veterinary care, and Givaudan in food, beverage, and cosmetic components.
Business overview and market position
Dassault Systèmes, a leader in 3D virtual twin technology and product lifecycle management (PLM) software, is well-positioned for the emerging paradigm. Renowned for its expertise in 3D design, digital mock-up, and PLM solutions, the company facilitates the creation of virtual replicas of real-world assets, enabling collaborative experimentation, risk-free scenario testing, and data-driven decision-making. This approach helps eliminate the inefficiencies associated with traditional prototyping, reduces material waste, and accelerates innovation cycles.
Historically, the firm has specialised in serving aerospace and automotive engineering sectors. In the 1980s, the flagship CATIA software emerged through the design function of it’s sister company Dassault Aviation, later becoming essential to the complex vehicle development of automotive OEMs. The business remains dominant within these segments, with 100% of planes being designed with the using the company’s software, and 100% of electronic vehicle manufacturers using at least one of the company’s solutions[6].
Figure 2: Dassault Systèmes
With over forty years of organic innovation and more than sixty acquisitions, Dassault has vertically expanded to build one of the most comprehensive and diverse portfolios of design collaboration software globally. Through thirteen unique business lines, serving twenty-five million users in over 350,000 enterprises, the company supports the research and development functions of twelve end-markets, resulting in unparalleled market exposure. Dassault’s solutions are employed in the design of over fifty percent of global drugs and medical devices, contribute to more than two-thirds of the semiconductors within smartphones, are used by six of the top ten shoe companies, and support over forty percent of pharmaceutical clinical trials[7].
Figure 3: Dassault Systèmes
Opportunity set and right to win
Dassault Systèmes maintains a robust and strategic position within its market, underpinned by its comprehensive portfolio of digital design and simulation software. However, many customers transact with multiple software providers resulting in a fragmented R&D environment. Consequentially, with an estimated TAM of US$100bn, there remains a substantial opportunity for continued organic growth through increased wallet capture.
To capitalise on this opportunity, Dassault has embarked upon a platform-centric strategy which aims to move customers away from a fragmented portfolio of digital design and simulation providers, into their end-to-end 3DS platform. Such consolidation provides clear operational advantages to customers, including the elimination of data silos, a reduction of the errors inherent to multi-platform data transfers, and the establishment of a centralised ‘single source of truth’. Within this, Dassault seeks to reposition itself from a traditional software provider to an indispensable platform through which clients’ intellectual property is generated, refined, and protected.
The efficacy of this strategy can be observed through the recent partnership announcement with the Volkswagen Group. Following a successful engagement with the BMW team, Volkswagen have expanded the relationship to cover the Volkswagen, Audi and Porshe brands, displacing several competitor solutions in the process. Over time, the company anticipates the expected value of these large contracts to double, driven by cross selling and migration up the supply chain. More generally, 40% of total 3DEXPERIENCE[8] (3DS) wins in Q4FY24 featured some form of competitor displacement and wallet share capture. We view this platform capability as a significant differentiator in the market, with no other player owning a portfolio diverse enough to ensure digital continuity across design, simulation, virtual twin experiences, and manufacturing processes.
In addition, the company expects its total addressable market to grow at a ~15% CAGR over the next 16 years, reaching a forecasted value of US$1tn by 2040. This is supported by the company’s beneficial exposure to multiple structural growth trends, including rapid growth in the digital twin economy, escalating demand for sustainability solutions, technological advancements in artificial intelligence, and the continued digitisation of new sectors. Whilst the forecasted TAM is an aspirational figure and does not meaningfully influence our investment thesis, independent analyses support the underlying strength of this market. The global digital twin market alone is anticipated to rise to US$119bn by 2029, up from US$9bn recorded in FY22[9].
Dassault aims to participate in this growth thorugh two primary levers:
Firstly, Dassault Systèmes is actively expanding its presence into new markets by offering tailored solutions to industries beyond its traditional manufacturing base. Two notable in-organic examples are the acquisitions of Centric Software and Medidata Solutions in 2018 and 2019, respectively. These acquisitions facilitated accelerated entry into the mainstream consumer goods and clinical trials, enabling the rapid deployment of 3DS capabilities in these new sectors. Alongside precision medicine, public infrastructure and urban environments, these remain key growth markets for the business.
Figure 4: Dassault Systèmes
Organically, Dassault Systèmes has begun promoting ‘value as a service’ business lines, leveraging existing intellectual property to provide service-based revenues through the sale of pre-constructed digital twins. This SaaS model reduces barriers to adoption, particularly for businesses that lack dedicated digital CAD teams. In the long term, management envisions the generative economy extending beyond core manufacturing markets to encompass a broader range of services and experiences.
Secondly, the company is exploring opportunities to provide additional value to existing markets as their digital needs grow. Central to this is the “3D UNIV+RSES” initiative, an AI-driven platform designed to utilise an ‘industrial metaverse’ for the creation and management of both virtual and real-world systems. Through the digitisation of physical research processes, researchers can expedite traditionally time-consuming processes such as “what-if” analyses, effective trade-offs, and large-scale cross-domain integrations. This strategy highlights the relationship between data and AI models as factors that drive productivity and reduce time to market for critical products, with Dassault offering a mechanism to maximise value from domain-specific data. With a substantial collection of 3D models and simulation outcomes accumulated over four decades, Dassault has a significant data advantage which it seeks to leverage, transforming its platform from a passive tool to an intelligent innovation assistant.
Opportunity
Despite its strengths, Dassault has faced recent challenges that have weighed on its short-term performance, driven primarily by cyclical downturns in its core automotive and healthcare segments, coupled with financial impacts from its strategic shift towards subscription-based revenue. In the automotive market, elevated interest rates have constrained consumer affordability, while heightened competition, particularly from Chinese entrants, has pressured established automakers, creating delays in customer decision-making and investments. In healthcare, particularly biotech, the post-pandemic normalisation of demand has combined with rising interest rates, resulting in reduced funding availability for clinical trials, thus impacting Dassault’s Medidata segment. Concurrently, the shift towards subscription revenue has significantly impacted Dassault’s short-term financial performance due to deferred revenue recognition, creating a lag in reported revenues and elevated upfront costs associated with investments in cloud infrastructure.
Nevertheless, we believe these headwinds are fundamentally transitory in nature. The automotive industry’s transition to electric vehicles and increased innovation pressure to compete with emerging global competitors positions Dassault’s solutions as increasingly critical. Similarly, healthcare cyclicality is anticipated to moderate as pharmaceutical firms inevitably ramp up R&D spend to counter upcoming patent expirations. Finally, the move towards a subscription-based revenue creates transient revenue models as one-time license fees are replaced by ratable subscription models. However, a shift towards cloud-based subscriptions should increase the proportion of recurring revenues whilst reducing spend on maintaining multiple versions of on-premises software, resulting in a net positive financial impact over time.
As such, we believe that the current weakness in Dassault Systèmes represents a compelling investment opportunity, underpinned by its dominant market position, leading technological edge, and exposure to a large and expanding total addressable market. The company’s innovative solutions, particularly its 3DEXPERIENCE platform, have become integral to industries ranging from aerospace to life sciences, ensuring its relevance in increasingly complex end markets. As a nodal ‘picks and shovels’ provider, Dassault benefits from rising competitive pressures across industries, as businesses seek advanced tools to navigate these dynamics. Despite these robust fundamentals, the current valuation disconnect relative to CAD peers suggests that the market is prioritising short-term cyclicality over long-term growth prospects. This mispricing offers an attractive entry point for long-term investors. Accordingly, we have initiated a position in the company and remain confident in its ability to deliver sustainable growth and capitalise on secular trends in digital transformation and product lifecycle management.
Footnotes:
[1] https://www.emarketer.com/content/worldwide-ecommerce-sales-break-6-trillion
[2] https://www.bcg.com/press/31october2023-ecommerce-global-retail-sales
[3] https://www.bain.com/insights/consumer-products-report-2025-reclaiming-relevance-in-the-gen-ai-era/
[4] https://sproutsocial.com/insights/index/
[5] https://zero100.com/95-of-new-product-launches-fail-heres-how-ai-can-help-you-be-more-successful/
[6] https://www.3ds.com/about/company/facts-and-faqs
[7] https://www.3ds.com/about/company/facts-and-faqs
[8] 3DEXPERIENCE – Dassault Systèmes flag ship platform products, integrating all 13 products.
[9] https://www.researchandmarkets.com/reports/6006021/global-digital-twin-market#tag-pos-6
Cover Image: Dassault Systèmes
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