Alteryx (NYSE:AYX) might eke out a profit this year, but AYX stock looks to be overvalued.
What is even more puzzling is that the stock has not moved up much this year. It has risen only 11.8% or so year-to-date and just 1.5% in the past year.
For example, right now this Subscription-as-a-Service (SaaS) software company trades at an astounding 257 times this year’s earnings and 16 times sales. And for next year its price-to-earnings (P/E) ratio is at a lofty 122 multiple and 12 times sales.
This kind of valuation is simply unsustainable in the long run. Either earnings have to move up dramatically or the stock has to come down.
I suggest that it is much more likely that the stock will correct at some point from these lofty valuations. Otherwise, its growth rates must be high and execution in terms of analysts’ expectations must be near perfect.
Earnings Expectations for AYX Stock
Alteryx makes B-to-B software. It’s not a new sexy app with lots of consumer interaction. In other words, it’s stodgy stuff. Alteryx software provides an analytics platform for data analysts and scientists worldwide. It helps companies share and run analytic processes and data analysis.
Last quarter the company barely made a non-GAAP profit of $1.684 million on revenues of $96.2 million. This was only two cents per share. The non-GAAP net income margin was only 1.75%. That is a very low margin for a software company.
Keep in mind this company sports a $7.4 billion market capitalization. So even if we annualized the recent earnings, and assume on a run-rate basis that it makes $6.74 million (8 cents EPS), the valuation is sky-high. Its P/E ratio would be 1,099 times earnings at today’s price (Sept. 25) of $111.90.
Analysts seem to think that earnings will pick up in Q3 and Q4. That is despite the fact that it had losses of $4.769 million in the first half or negative 7 cents per share.
For example, a poll of 14 analysts by Seeking Alpha estimates on average that Alteryx will make 44 cents per share this year. And the estimate for next year is 99 cents per share.
Hence the huge multiples. But this implies that earnings will dramatically turn around from the measly 2 cents per share it made in Q3. Good luck with that. With its high P/E ratio today the execution has to be perfect or AYX stock will tumble.
The Snowflake Effect
Recently both Snowflake (NASDAQ:SNOW) and JFrog (NYSE:FROG), similar SaaS companies went public in IPOs with exorbitant valuations. SNOW stock is at 72 times revenue P/E and FROG stock is at 65.5 times sales. And, of course, neither company has any earnings to speak of.
So, I don’t know if the recent uptick in AYX stock is as a result of these SaaS stocks nose bleed valuations. Or perhaps the latter stocks got their sky-high multiples from emulating the massively high valuation of AYX stock. Maybe it is a mixture of both and they are feeding off of each other.
I have written several articles analyzing Snowflake and JFrog IPOs recently. I found similar investor enthusiasm with these stocks and the kind of valuation seen in AYX stock.
In the end, most investors won’t be able to make money off of these stocks unless they come through with huge growth rates.
What To Do With AYX Stock
Not all stocks in this general SaaS software arena with recent IPOs are this expensive. For example, Cloudera (NYSE:CLDR) went public in 2017 and has a $3.3 billion valuation. This is just 4 times estimated sales and 31 times estimated earnings.
In addition, MongoDB (NASDAQ:MDB), which went public in 2017, has a price-to-sales ratio of just 25. Elastic (NYSE:ESTC), which IPO’d in 2018, has a price-to-sales multiple of just 16.7x. Workiva (NYSE:WK), an older company which IPO’d in 2014 is at just 8 times expected sales.
My point is that once these public SaaS companies mature their valuation ratios tend to come down. I am afraid that is what is in store for AYX stock as well.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.