Once upon a time, data analytics software giant Alteryx (NYSE:AYX) could do no wrong on Wall Street, with AYX stock climbing from a $14 IPO price in early 2017, to a $150 price tag by September 2019.
Then, seemingly out of nowhere and on no real downside catalyst, AYX stock fell out of the sky. From September 2019 to late October 2019, shares plunged from $150 to $90. Alteryx didn’t report bad numbers during that stretch. There wasn’t any management turnover. There were no outside investigations, adverse legislation or big Wall Street downgrades.
Instead, Alteryx shares just collapsed. Momentum growth stocks tend to do that every once in a while. When they do, it’s usually because valuation risks finally caught up with the stock.
Indeed, that’s exactly what happened with AYX stock. This is a really good company that has sustained impressive momentum in a secular growth space. But, the stock went too far, too fast, and shares were due for a correction. They’ve had that correction. Shares have bounced back some. But not all the way back to $150.
Naturally, investors should be asking: Now what? Will valuation friction keep shares from clawing back to $150? Or will shares ignore valuation risks and push back to all-time highs?
I think the latter. Here’s why.
Alteryx Is Fundamentally Supported at $120
Alteryx’s long-term profit growth prospects provide fundamental support for the stock at a $120 price tag today.
The story here is relatively simple. Alteryx has created an end-to-end, streamlined data analytics platform, to help enterprises both big and small make better sense of the vast amount of data at their fingertips. This is a great business to be in today. The volume of data in the world will only grow with the growth of the Internet-of-Things. The importance of that data will also only grow, as enterprises increasingly rely on data-driven processes. Consequently, the amount of money that flows into data science platforms like Alteryx will rise significantly for the foreseeable future.
To be sure, there are several data science platforms out there right now, and Alteryx is immersed in a very competitive marketplace that includes some very big, deep-pocketed players. The platform has some advantages (end-to-end services and no-code capability being two of them) and some disadvantages (lack of product innovation being one of them). As such, while Alteryx will grow with the data science market over the next several years, growth will be limited by competitive factors and platform shortcomings (i.e., this is a 20%-plus compounded annual growth business over the next few years, not a 30%-plus one).
Gross margins will remain very strong at 90% and up, supported by steady demand drivers. Operating margins will improve with scale. But, the intensely competitive nature of the data science market implies that Alteryx will forever have to spend big on marketing and product development to remain relevant. This sustained big spend will limit how high operating margins can go (i.e., this is a ~35% operating margin business at scale, not a 50% one).
Combining all these observations into one model, my numbers suggest that $5 is a doable earnings-per-share target for Alteryx by 2025. Based on an application software sector-average 35-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for the stock of $120.
Alteryx Will Make a Run for $150
Although Alteryx isn’t fundamentally supported at prices above $120 today, I do think shares will make a run for $150 in 2020.
In simple terms, this is the perfect environment for growth stocks, and the perfect environment for Alteryx. With respect to growth stocks, 2020 will have the perfect mix of rebounding economic activity (which will help growth stocks sustain their growth trajectories) and enough geopolitical risks to keep rates low (which will help growth stocks sustain their nosebleed valuations). From this perspective, growth stocks, which sustain their growth momentum in 2020, should perform quite well against the backdrop of continued low rates.
Alteryx will do more than sustain its growth momentum in 2020. They will likely gain more momentum. That’s because corporate economic activity will rebound in 2020 as trade tensions ease and economic confidence rebounds. Spending across the corporate tech sector will rise, implying more money allocated toward things like data science platforms. As more money goes into that space, Alteryx’s revenue growth trajectory has a chance to improve.
Big picture — rebounding spending trends across the global corporate tech sector imply that Alteryx will, at the very least, sustain its growth momentum in 2020. Assuming so, AYX stock should head higher, despite valuation risks, because low rates will provide continued support for the stock’s extended valuation.
Bottom Line on AYX Stock
AYX stock will be stuck in a tug-of-war between strong growth and an extended valuation in 2020. For the foreseeable future, low rates and continued business momentum will help strong growth win that tug-of-war, and push the stock higher.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.