Alteryx: Improving Fundamentals Provide A Leg Up To Further Growth

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About: Alteryx, Inc. (AYX)
by: David Krejca
Summary

Alteryx is a fast-growing data analytics software company.

Last year, the company broke even and is net operating cash flow positive from 2017.

Historical relative valuation suggests the company’s shares are expensive but can be justified by Alteryx’s growth.

Investment Thesis

Shares of Alteryx (AYX), a data analytics company, have skyrocketed over the last few months, and are very likely to sustain their uptrend momentum as the company broke even last year and reached a positive net operating cash flow a year earlier. The company is still relatively unknown and therefore could significantly appreciate after its story gets noticed by a broader investment audience.

Corporate profile

Alteryx (AYX) is a data analytics company providing a subscription-based platform. The company’s solutions enable its customers to discover, view, prepare and analyze data from various sources and benefit from synthetized data-driven decisions. The company aims at eliminating mundane analysts’ data tasks and saving up time for more sensible work undertakings. The company’s capabilities allow customers activities such as editing R and Python codes without requiring prior coding experience. Last year, the company had 800 full-time employees and customers in more than 70 countries, including over a quarter of Global 2000 companies. Over the last three years, the company’s customer base has expanded from roughly 1400 customers to 4700 customers.

Key insights from the latest quarterly earnings call

During the latest quarterly earnings call, the management of the company reiterated especially the key benefits of its solutions and a non-negligible portion of unrealized potential. Based on the company’s internal estimates, Alteryx’s solutions can free up to 16 hours every week due to automatization of mundane data tasks. The company projects the core total addressable market to be of approximately $23B and full TAM to be around $47B. In the first quarter, the company added 277 new customers, including large global enterprise from Global 2000 list such as Autodesk (NASDAQ:ADSK), eBay (NASDAQ:EBAY), Luxottica Group, Netflix (NASDAQ:NFLX), Twitter (NYSE:TWTR), and WeWork (VWORK).

Financial analysis

Having a closer look at the company’s financial statements, Alteryx has strong liquidity position (current ratio of 3.6) and sustainable level of long-term debt financing (37 percent long-term debt to capital) which enhances the company’s key profitability measure (~ttm ROE 12 percent). The development in the company’s net operating cash flow in the last two years and a breakeven last year suggest that Alteryx has gotten on a positive business development trajectory and better years could be ahead.

Source: Quotes WSJ

At what price it makes sense to buy Alteryx?

In the light of revenue variation of popular Peter Lynch's earnings line for the projection of possible per share values of the company, I see Alteryx's as an attractive long-term opportunity. Based on my model assuming 60 percent constant annual revenue growth, 63 million shares outstanding diluting at 3 percent annual rate and an average price-to-sales (P/S) ratio of 20x (currently 20.6x), the company's share price by the end of 2022 is forecasted to reach $467. If the company’s shares get bought at 20x price-to-sales ratio and remain in that range, the company’s long-run annualized return potential could be as much as 50 percent. Should the price-to-sales ratio stand at 20x and over the course of the next four years fall to 10x, the company's shares' annualized upside return potential could be as much as 27 percent.

Perhaps the greatest question here is whether the current price-to-sales ratio level is sustainable. Over the last few years, the share price and price-to-sales ratio have been heavily correlated and have risen to unprecedented highs.

Key risks

  • The company has a history of losses and the recent turnaround in financials could be only temporary.
  • The company has been growing rapidly and if it fails to effectively manage its growth and fails to invest in continued expansion, its future operations and financial results may be harmed.
  • If the company fails to maintain its corporate culture as it grows, it could lose teamwork, innovation, focus and passion necessary for the execution and smooth running of operations.
  • The company has a limited operating history and its subscription-based model has not been fully proven yet and if the businesses fail to adopt the platform, its operating results and financial condition may be negatively affected.
  • If the company fails to retain existing employees and attract and recruit new talent, its operations and financial results may be adversely affected.
  • If the company fails to develop and release new products and services in a timely and cost-effective manner, its business operations may be negatively affected.
  • Fierce competition may put pressure on the company’s margins and adversely impact the company’s financial condition.
  • Due to international operations, the company faces a whole range of risks stemming from varying regulatory environments and foreign exchange rates.
  • The company heavily depends on technology and if it fails to operate as intended or its security is breached, the company’s reputation could be substantially harmed.

The bottom line

To sum up, Alteryx is seemingly an exceptional information technology and service company with a great room for further growth. Obviously, the company is at an early stage of development and financial statements suggest the company has started gaining considerable momentum. The company has solidly expanding asset base and the current headcount provides a solid opportunity for strong networking effects facilitating new growth.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.