As recently as September, Alteryx (NYSE:AYX) was trading at a 52-week and all-time high of $147.79. Since then, AYX stock has fallen back to earth. As I write this, Alteryx stock is trading a little over $98, well off its September highs.
My InvestorPlace colleague Luke Lango recently suggested that the data analytics company isn’t being shown the respect it deserves as one of the few Software as a Service (SaaS) stocks that are solidly profitable.
He believes once SaaS stocks come back in favor with investors, AYX stock will zoom back to $150.
First, let’s remember that it’s profitable on a non-GAAP basis. Through the first nine months of its latest fiscal year, Alteryx lost $3.5 million on a GAAP basis from $261.5 million in revenue. In the same period a year earlier, it did manage to earn $11.5 million on $148.3 million in gross profits.
That said, even at $108, I don’t think you can call Alteryx stock cheap. Here’s why:
Some of Its Peers
In March of this year, InvestorPlace contributor Tom Taulli, who’s written a book about the basics of artificial intelligence, recommended investors take a closer look at seven big data stocks, including Alteryx.
I’ll use the other six names on Taulli’s list as my cohort comparison.
Alteryx Valuation vs. Six Peers
|Company||P/B||P/S||YTD Total Return|
Of the six stocks listed by Taulli, I’m most familiar with Splunk. So, that’s the one I’m going to focus on in assessing Alteryx’s valuation.
In terms of both price-to-book and price-to-sales, Splunk is considerably less expensive than Alteryx. Now, because several of the names on this list don’t make money, I didn’t include a forward price-earnings ratio in the table above. However, Splunk’s forward PE is 64.5, while Alteryx’s is 149.3, more than double Splunk’s multiple.
By all three valuation metrics, Splunk is considerably cheaper than Alteryx.
Let’s Look a Little Closer
In the third quarter ended Sep. 30, Alteryx had 5,613 customers, 6.3% higher than in the second quarter, and 30.1% higher than a year earlier. Those are pretty impressive numbers.
In Splunk’s third quarter, it finished the three-month period with 19,000 customers, including more than 90% of the Fortune 100. Year over year, Splunk increased its customer base by approximately 18.8% and sequentially by 5.6% from the second quarter, adding nearly 1,000 customers.
Now, I realize that each company’s pricing is slightly different based on their business models and the kind of services they provide, but in the subscription business, adding customers is one of the key ingredients to growth.
Both are doing a good job.
A second metric to use to evaluate subscription-based business models is to understand how successful a business is at retaining customers and growing the amount of revenue it receives from that customer.
Alteryx uses the dollar-based net expansion rate to assess what kind of job it’s doing retaining customers and growing the revenue from those customers. In the third quarter, it had a rate of 132%, which means it received 32% more from a specific set of clients this quarter compared to last quarter.
This number should always be well above 100%.
Splunk, on the other hand, uses “total annual recurring revenue” and “subscription annual recurring revenue” to evaluate how it’s doing with its existing customers.
In the third quarter, Splunk had total annual recurring revenue of $1.44 billion, 53% higher than Q3 2019. That figure is annualized. In the third quarter, Splunk’s total revenues grew by 30% to $626.3 million. That’s a very healthy growth rate.
While Alteryx doesn’t break out what its dollar-based net expansion rate represents in terms of actual revenue dollars, the fact that its sales grew by 65% in the third quarter to $103.4 million tells you a lot about its future potential.
However, through the first nine months of both companies’ fiscal years, Splunk had $1.6 billion in revenue compared to $261.5 million for Alteryx, which means Splunk, despite having a growth rate half that of Alteryx, grew its total dollars of revenue over the first nine months by 4.5-times Alteryx.
Given Alteryx’s revenues are about one-seventh Splunk’s, it ought to be growing sales at twice the percentage rate. I would be concerned if it wasn’t.
The Bottom Line on AYX Stock
Alteryx has a great business. That’s indisputable.
However, as value stocks become more popular heading into 2020, it’s going to have to continue to show it can profitably scale its business to justify its expensive valuation.
Right now, if I had to choose between Alteryx and Splunk, I’d go with the latter.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.