Alteryx: Pick And Shovel Play On The Data & Analytics Revolution
Long Only, Value, Growth At A Reasonable Price, Commodities
Seeking Alpha Analyst Since 2009
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Former sell-side investment research analyst with CFA designation + Strategy consulting background. Looking to retire by age 40.
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Summary
- Alteryx (NYSE: AYX) solves a huge pain point for data analysts not addressed by competing solutions, resulting in outstanding historical 130%+ net retention rate.
- Stock is valued at discount to other SaaS peers due to weak 2H 2020 guidance.
- However, demand for Alteryx’ solutions are only temporarily deferred due to COVID impacts on sales cycle, and strong long-term growth trajectory are still in play.
- Shares are undervalued with estimated pricetarget of $150-$180/share (implying 40-60% upside from current price range).
DISCLOSURE: This article was written in 3Q 2020 when shares were trading for ~$100 per share. As such some of the metrics may be dated.
Company Introduction
During the California gold rush, the people who struck it rich were often not the actual gold miners themselves. Rather it was the merchants supplying the gold miners with picks, shovels, and even work jeans (such as Levi's). Fast forwarding to the 21st century, it is now data which represents the new "gold" and as companies across the globe race to mine and analyze this digital gold, the companies providing the tools and resources to support these efforts will reap outsized profits.
Alteryx is a visionary company that is riding shotgun on the strong secular trend of data transformation among all corporations. The company offers a full suite of tools and platform across the entire data & analytics value chain, from data cataloging, preparation, analysis, visualization, and generation of data-driven recommendations. The company was founded in 1997, and is still led by one of the original founders, Dean Stoecker.
Alteryx has generated outstanding top line CAGR of almost 70% during the past 3 years (2016-19) with gross margins expanding from 81% in 2016 to 92% in 2019. These strong financial results are driven by Altery’x ability to solve significant pain points for companies across the globe that are looking to drive a data & analytics transformation. According to a recent IDC survey, the average data analyst wastes 26 hours per week working in spreadsheets and 8 hours per week repeating the same data tasks. Alteryx addresses these pain points through its intuitive and comprehensive data analytics tools & platforms, which do not require deep data science expertise to use unlike other tools such as SAS, R, Python, etc. The company has historically averaged outstanding net retention rates of over 130%, demonstrating the value proposition of Alteryx’ solutions.
While many other competing data & analytics exist, Alteryx has 2 main competitive advantages:
- Alteryx provides an end-to-end solution along the data & analytics value chain, from data cataloging, preparation, analysis, visualization, and generating data-driven recommendations. Most other products focus on narrower aspects of the value chain, and can be easily plugged into Alteryx as the unifying “platform” of choice
- Alteryx is friendly for users without deep data science backgrounds (unlike SAS , Python, or R). Given the growing gap between supply of available data scientists and demand for data & analytics workers, the appeal of Alteryx as a tool for analytically minded workers without deep data science expertise will likely increase
Investment Opportunity
During the most recent quarter (2Q 2020), Alteryx reported revenue of $96M, which represented a decline of 12% from 1Q 2020 and only a 17% YoY increase from 2Q 2019. The weak sales figures & muted guidance for 2H 2020 caused a significant sell-off in the stock price. However, we view this sell-off as an opportunity to purchase a blue chip SaaS company with strong secular tailwinds at a discount, as we expect Alteryx’ strong growth trajectory to return over the medium term as near-term sales disruption impacts subside.
Diving deeper into Alteryx’ growth drivers, during the past 3 years (excluding 2020 results) Alteryx has increased total customers by 30-40% annually, and increased its business within each customer by 30%+ (net retention rate). Combined this yield combined revenue growth CAGR of almost 70%.
In their 2020 Q2 earnings call commentary, management explained that sales slowdowns were largely driven by longer sales cycles with new customers (more cautious on new spending give economic uncertainty), and also by existing customers downgrading to a lower level of service to save on costs. In my view this confirms my long-term bullish view of the company, since Alteryx was still able to retain the vast majority of its customers despite the economic uncertainty, and planned new sales were likely deferred but not cancelled to satisfy increased scrutiny on corporate spending for the time being.
Fundamentally, nothing has changed with the huge need for effective solutions to power the Data Revolution nor with the clear competitive advantage Alteryx enjoys. Starting in 2021, Alteryx’ strong growth rates should return, with the market rewarding the stock with a valuation more in line with its fellow SaaS peers.
Valuation & Price Target
After the sharp price downturn, Alteryx now trades at 15-16 times TTM sales. Other fast-growing SaaS peers such as ServiceNow, Atlassian, Coupa, Okta, and Twilio trade for 20-30 times sales. Assuming Alteryx can resume its historic growth trajectory, there is no reason why the stock cannot regain a 20-25 times sales multiple. This leads to a medium-term price target of $150-$180 per share, implying a 40-60% upside from current price levels.
Conclusion
Alteryx represents an opportunity to pick up a blue chip SaaS player in the rapidly growing field of Data & Analytics for a large discount to its fellow SaaS peers. The market has punished the stock for temporary growth declines in 2020. But as temporary negative sales impacts subside, we expect the company to resume its rapid growth trajectory and continue to reap the benefits of being a key linchpin in the Data & Analytics Revolution.
Analyst's Disclosure: I am/we are long AYX.
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.
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