Alteryx: Come, Play In The Data Analytics Sandbox

Summary

• Data is the most valuable asset in the digital economy. Alteryx's platform provides analytic process automation tools to data scientists and analysts, thereby enabling firms to maximize their data assets.
• Alteryx's product offering is highly valued and uniquely differentiated, as evidenced by the explosive revenue growth (3-YR: +65% CAGR) and gross margins of more than 90%.
• According to Gartner's 2020 Magic Quadrant, Alteryx is a leader among Data Science and Machine learning platforms with the highest execution ability.
• The projected return on a ten-year investment in Alteryx is ~14.2% CAGR if one were to buy at $150 (this is with a solid margin of safety implemented).
• Hence, I rate Alteryx a buy at $150 and below.
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Source: www.alteryx.com

Investment Thesis

Alteryx (NYSE:AYX) is improving business through advanced data analytics by empowering businesses, regardless of technical acumen, to quickly and easily transform raw data into actionable insights and deliver improved data-driven business outcomes.

Alteryx's users leverage its end-to-end analytic platform to quickly and easily find, access, prepare, and analyze data from multiple sources, then deploy and share analytics at scale. The sophistication, speed, and ease-of-use that Alteryx's platform provides are enhanced through very intuitive and highly repeatable visual workflows.

In layman terms, the company offers a platform where you can utilize data analytics tools to maximize the power of your organization's data assets. In the 21^st century, the philosophy 'good data beats opinion' has become crucial in the success of businesses.

Nowadays, micro-level data analysis helps business managers to identify the KPIs (key performance indicators) that influence business revenues, profits, and costs; thus, enabling enterprises to make smart data-driven decisions rather than decisions based on opinions.

As more companies begin treating data as an enterprise-wide corporate asset, sharing of data about products and customers creates opportunities to up-sell and cross-sell, while improving retention rates and customer service.

By combining internal and external data, every company in the world can develop new products and services across lines of business. As a result, the need for data analytics and machine learning tools has never been higher than what it is today.

Alteryx is a leading platform in the data analytics and machine learning space, with revenues growing at +65% CAGR over the last three years. Furthermore, the demand for the Alteryx platform is only going to accelerate in the near future, as companies undergo digital transformation and embrace data.

Alteryx's APA platform is uniquely differentiated, which is evident in its gross margins of 90%+. The business is run prudently, i.e., even in its high growth phase, Alteryx is already a free cash flow generative venture. As the company matures, the free cash flow margins will improve, and this improvement, coupled with organic growth in the business, will drive Alteryx's free cash flow per share (i.e., share price) higher.

In today's article, we will explore Alteryx's business in greater depth, after which we will run it through the L.A. Stevens Valuation Model to ascertain a fair value for the stock and projected returns on a ten-year investment.

Exploring Alteryx

Now that you have seen Alteryx in action, you know that the platform enables users to perform code-free data analytics. However, I think you would be interested in learning as to why high-tech companies like Atlassian (TEAM), Box, Inc. (BOX), Cisco (CSCO), Amazon (AMZN), Dell (DELL), and many others are Alteryx's clients. The answer is Alteryx's rich data science pipeline for predictive modeling. To put things into context, even Alteryx's supposed competitor Tableau (DATA) is also its customer!

To further understand what Alteryx entails, let us hear directly from Alteryx CEO Dean Stoecker:

In the video, Dean talked about how Alteryx's positioning (in the middle of the stack) in the client organizations makes the product crucial for its customers. Some of you might be wondering, but what does that mean? So, let's try to understand how Alteryx fits into the data analytics realm.

Source: Alteryx Investor Presentation

The world is undergoing a digital transformation, and enterprises now have unparalleled access to data across their business units. Data scientists and analysts are working with big data to derive actionable insights that improve business performance. Alteryx provides these data operators with an easy to use, code-free, data analytics platform, where they could create repeatable workflows (automate processes), thus, saving a lot of time for the analysts who could focus on generating actionable insights.

Source: Alteryx Investor Presentation

The Alteryx platform has countless use cases including but not limited to Customer Targeting, Sports Analytics, Shipping Optimization, and many others. Alteryx recently launched its APA (Analytic Process Automation) platform. To learn more about it, please look at the video below:

Alteryx Platform: Analytic Process Automation

Source: What is Analytic Process Automation? | Alteryx

Source: Alteryx Investor Presentation

As I mentioned earlier, the Alteryx APA platform makes life easier for data scientists and analysts. The platform accepts inputs from several sources and allows users to merge data from multiple sources. Once the data is available within the platform, the analysts could apply more than 270 in-built analytics or create [code] their own analytics. The rich data science predictive modeling pipeline is making the Alteryx platform popular among the data science community.

Source: Alteryx Investor Presentation

Alteryx's Total Addressable Market

According to Alteryx, its total addressable market is currently valued at $49 billion ($25 billion in IT and $24 billion in Line-of-Business).

Source: Alteryx Investor Presentation

Let's hear Dean Stoecker (Alteryx CEO) talk about Alteryx's addressable market and the $24 billion (i.e., 47 million Excel Users) opportunity.

Dean thinks Alteryx's addressable market is a winner-takes-most opportunity. However, it's obviously unrealistic to assume that Alteryx will capture a 50% to 100% market share, as even with a superior product, limited sales teams will prevent such an outcome. Still, Alteryx's LTM revenue of only $450M means it could grow revenues at 20%+ CAGR for the next ten years.

Customer Growth And Net Retention Rate

Alteryx's go-to-market strategy entails a 'land and expand' model. The company claims that it offers customers compelling business value by providing significant time savings and comprehensive data analytics that improve business outcomes.

Source: Alteryx Investor Presentation

The success of Alteryx's sales strategy is evident from its dollar-based net retention rates. Since its IPO in 2017, Alteryx has consistently logged DBNR rates of more than 128% every quarter, which proves that Alteryx's users are happy with the platform's effect on business outcomes and want more.

Source: Alteryx Investor Presentation

I mentioned that Alteryx logged +65% CAGR revenue growth over the previous three years. The revenues have been supercharged by high net retention rates combined with rapid (+30% y/y) new customer acquisitions.

Source: Alteryx Investor Presentation

The power of the Alteryx APA platform has enabled the company to serve more than 6400 customers across varied industries like Retail, Food Services, Consumer Products, Media, Financial Services, Energy and Utility, Healthcare, Travel and Hospitality, Manufacturing, and Technology. Alteryx finds applications wherever data is present, and data is everywhere!

Source: Alteryx Investor Presentation

Competitive Landscape And Leadership Position

Alteryx is not the only data science and machine learning platform. Its competitors include giants like SAS, Google (GOOG) (GOOGL), Microsoft (MSFT), IBM (IBM), and MathWorks. Still, Alteryx's execution ability is unmatched, which earned the company a place among Gartner's 2020 Magic Quadrant for Data Science and Machine Learning Platforms.

At this moment in time, Alteryx is the most complete solution in the market. Even its data prep and visualization rival Tableau has become Alteryx's client. Alteryx is well-positioned to garner a significant market share in the booming data science and machine learning market.

Source: Alteryx Investor Presentation

Given the vast addressable market, a technically superior product, and high client satisfaction, I expect Alteryx to grow at an accelerated pace in the near term and become one of the primary beneficiaries of the Data Boom.

Analyzing Alteryx Through Numbers

As can be seen below, Alteryx's revenues have been growing explosively over the last three years. Moreover, gross margins above 90% are extraordinary and show the immense value of Alteryx's offering. Furthermore, the company is already profitable, as illustrated by ~5% operating margins (which the company aims to grow to 35-40% in the long term)

Source: YCharts

In the last three years, Alteryx's revenues propelled from a meager $95 million to $450 million (~5x) at 65.57% CAGR. On top of that, gross margins expanded from 81% to 90%+. A gross margin of 90% is glorious (monopolistic) and indicates that Alteryx's platform is differentiated and highly valuable in the data science and machine learning marketplace.

Source: YCharts

Alteryx has been reinvesting its entire profits back into the business to harness future growth, which is evidenced by the high SG&A (67.23% of revenue) and R&D (18.02% of revenue) expenses. I take this as an energetic show of confidence by the management in Alteryx's platform and business prospects.

Source: Alteryx Investor Presentation

Alteryx is already operationally profitable on both GAAP and Non-GAAP basis. With scale, the company expects SG&A expense (as % of revenue) to be much lower. As a result, one can expect a boost in the operating margins in the future.

Balance Sheet And Cash Flow Analysis

Source: YCharts

Buying Alteryx on the cheap is every investor's dream. The reason I say that is because Alteryx's extraordinary growth is also profitable, i.e., the company is already free cash flow-generative. While growing at a CAGR of 65% each year since going public, Alteryx has simultaneously managed to churn out positive free cash flow.

Alteryx has a strong balance sheet with enough cash to pay off its entire financial debt. In the short term, Alteryx's current ratio of 4+ indicates that the company has no immediate liquidity concerns. Hence, investors do not need to worry about dilution. As the company matures over the next few years, I expect Alteryx's balance sheet to become a fortress due to the underlying strength of its business.

What Is Alteryx's Fair Value?

To answer this question, we will employ our proprietary valuation model. Here’s what it entails:

1. Traditional discounted cash flow Model using free cash flow to equity discounted by our (as shareholders) cost of capital.

2. Discounted cash flow model including the effects of buybacks.

3. Normalizing valuation for future growth prospects at the end of the ten years. (3a.) Then, using the current stock price and the estimated stock price at the end of 10 years, we get a CAGR. If this beats our hurdle rate by a considerable margin, we invest. If not, we wait for a better buying opportunity.

Now, let's check out the results!

L.A. Stevens Valuation Model

Assumptions:

Assumption	Value
Free cash flow per share	$2.4
Free cash flow per share growth rate	21%
Terminal growth rate	2%
Years of elevated growth	10
Total years to stimulate	100
Discount Rate (Our “Next Best Alternative”)	9.8%

Click to enlarge

Using the L.A. Stevens Valuation Model, I determined that, conservatively speaking, Alteryx's fair value is $125.35, i.e., the stock is currently overvalued by 19.67%.

Source: L.A. Stevens Valuation Model

Now, keep in mind that Alteryx grew at 43% y/y in Q1 2020. And it's projected to grow at 27%+ over the next three years, as you can see below:

Source: YCharts

So, this growth rate provides us our "margin of safety," by which we can be very, very wrong, and still be right! Now, many analysts would stop looking at Alteryx after a DCF valuation, deeming it too expensive, but we go a little bit further.

So, let's check out the returns one could generate if they were to buy at $150. The gains below are predicated on the growth of free cash flow per share. Our proprietary model calculates future free cash flow based on the assumptions provided above; then, I apply an assumed price to free cash flow per share (in the year 2030). Here's the result:

Source: L.A. Stevens Valuation Model

• Therefore, if an investor were to buy at today's price of $150, he/she can expect a cumulative annualized growth rate of about 14.18% on a ten-year investment, which is well above our "hurdle rate," which is our "next best alternative;" i.e., the 90-year annualized performance of SPY (9.8%).

Hence, I recommend investors to buy Alteryx for their long-term growth portfolios at the current price of $150 and add on any significant dips.

Concluding Remarks

Data in the 21^st century is similar to oil in the 18^th century: an immensely untapped valuable asset. Just like oil, there will be huge rewards for those who understand data's fundamental value and learn to extract and use it. Alteryx allows users (even ones with no technical acumen) to perform advanced data analytics through a code-free platform. The data science and machine learning boom is creating a vast market opportunity for Alteryx, and the company is well-positioned to make the most of it.

The APA platform is genuinely at the epicenter of the future of data analytics. Alteryx is not the only player in town, but its platform is truly revolutionary, and I believe Alteryx is set to dominate its market over the next ten years. Even though the stock is trading above its intrinsic value, the expected returns of ~14% CAGR on a long-term investment make Alteryx a strong buy.

Key Takeaway: I rate Alteryx a buy at $150 and below.

As always, thanks for reading; remember to follow, and happy investing!

Analyst’s Disclosure: I am/we are long AYX, TWLO, GOOG, FB, AMZN. 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.