Alteryx (NYSE:AYX) stock got wiped out in early August after the data analytics and automation company reported second quarter numbers which topped expectations, but also included a miserable guide for the rest of the year.
AYX stock plunged from above $170 before the print… to under $110 a few days later.
Investors should be asking: Was Alteryx’s second quarter earnings report really that bad to the point where it warrants a 35% plunge in one of the market’s strongest growth stocks?
The simple answer is no. Not at all.
So buy the dip in AYX stock. This is a long-term winning investment, now trading at a deeply discounted price tag. You don’t get that combination very often in this market. So take advantage of it.
Here’s a deeper look.
Alteryx’s Mixed Earnings
Despite the huge sell-off in AYX stock, Alteryx actually had itself a pretty solid quarter.
Yes, across the board, the business slowed down in the quarter, as Covid-19 forced customers to cut back on software spending as budgets became tight. But the slowdown in Q2 wasn’t as bad as Wall Street feared.
Alteryx’s customer count rose 27% year-over-year in the quarter, versus a trailing 4 quarter average of 30% growth. Average revenue per customer did drop 8%. But that was entirely expected. Revenues rose 17% year-over-year, much better than expected. Gross margins were up nearly 90 basis points in the quarter. Operating margins were down only 105 basis points, driven by minimal SG&A deleverage despite the revenue growth slowdown.
Net profits topped expectations in the quarter.
Overall, it wasn’t a bad quarter. Indeed, it was much better than expected.
But it wasn’t what happened in Q2 that freaked out Wall Street — it was what management is saying is going to happen in Q3 and Q4.
Bad Outlook Overstated
The huge post-earnings plunge in AYX stock can be chalked up to one thing: Management’s awful second-half 2020 guide.
Specifically, management is calling for third quarter revenues to rise just 9% year-over-year, versus 17% growth in Q2 and what was 50%-plus revenue growth throughout 2019. Worse yet, the implication based on management’s full-year revenue guide is that Q4 revenue growth will actually be negative.
That’s wild to think about. In their July/August earnings reports, most companies have given favorable updates on business activity, and issued guides which call for things to get better in the second-half of 2020.
Not Alteryx. The company is saying things will actually get worse in the second-half of 2020.
But will that actually happen?
I doubt it. Management’s guide assumes “no major changes to macro conditions” in the back-half of 2020. But major changes are happening already. Of particular relevance, business confidence is already recovering on the back of rebounding consumer spending, easing mobility restrictions and favorable Covid-19 vaccine news.
These trends will persist. As they do, businesses will re-up spend on data science platforms like Alteryx. Management’s third and fourth quarter guides will prove antiquated, and the actual numbers will come in way ahead of expectations.
Growth Drivers Remain Favorable
The big picture growth drivers supporting AYX stock remain highly favorable.
That is, we are increasingly pivoting into a world wherein data is everywhere. In that world, tools which help companies glean value from that data, and turn it into actionable insights, become immensely useful. Indeed, they become mission-critical.
To that end, data science platforms will reach enterprise ubiquity over the next decade, as every single enterprise will lean into data analytics to develop competitive advantages and optimize operating efficiency.
Alteryx provides these tools. And they are the best in the business at doing so. Year in and year out. Thanks to advantages such as being end-to-end, code-free and highly scalable, among other things.
Yet, only 37% of Global 2,000 companies use Alteryx’s platform. Those companies are presumably developing competitive advantages over the 63% that aren’t using Alteryx, because they either aren’t using data analytics to drive successful outcomes, and/or because they are using an inferior product.
Consequently, secular growth drivers and competitive dynamics will promote broader adoption of Alteryx’s platform over the next several years — so long as Alteryx remains a top-tier data science platform.
Innovation Will Sustain Leadership
I have confidence that Alteryx will remain a top-tier data science platform, largely because the company is relentlessly innovative.
Just look at the second quarter. In the same quarter that Covid-19 significantly disrupted the company’s business, management rolled out three major innovations which, in sum, only increase the effectiveness and usefulness of the Alteryx platform. Those three innovations include:
- Intelligence Suite, which allows customers to — in a code-light way — develop powerful and robust machine learning (ML) powered predictive models.
- Analytics Hub, which streamlines Alteryx’s various solutions into a single hub, making it easier for different teams in the same organization using Alteryx in different ways, to work together to achieve a common goal (which is important, since Alteryx is used across various business verticals).
- Alteryx Multithreaded Processing engine, which allows customers to execute workflow simultaneously — as opposed to sequentially — resulting in processing efficiency on larger data sets with complex analytical process.
These innovations will help Alteryx sustain its leadership position in the data science world for the next few quarters. So long as management keeps innovating — and the track record says they will — then Alteryx will similarly sustain this leadership position for the next several years.
Alteryx Stock is Undervalued
By my numbers, Alteryx stock is way undervalued today.
Because management projects to keep innovating and successfully executing against the company’s huge data science opportunity, Alteryx should be able to sustain largely 10%-plus revenue growth over the next 10 years.
Gross margins will remain strong, up above 90%, thanks to strong demand and favorable pricing structures. Economies of scale will drive positive operating leverage and push operating margins up towards management’s long-term 40% target.
Assuming so, then my modeling suggests that Alteryx will hit $8.45 in earnings per share by 2030. Based on 35-times forward earnings multiple and an 8.5% discount rate, that implies a 2020 price target for AYX stock of over $140.
Thus, below $110, AYX stock is undervalued today.
Bottom Line on AYX Stock
Alteryx’s earnings report wasn’t that bad. It certainly wasn’t bad enough to materially change the fact that this is still one of the strongest data science companies in the world, and by extension, one of the strongest growth companies in the market.
The only difference now is that AYX stock is much, much cheaper than it was before.
Indeed, AYX stock is now undervalued.
In today’s market, you’d be hard-pressed to find a strong growth stock trading at a discounted valuation. It won’t last. So take advantage of it in AYX stock while you can.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.