Alteryx (NYSE:AYX) has become a prime example of how quickly things change in the software-as-a-service “SaaS” space. Just a year ago, Alteryx was one of the fastest growing SaaS companies out there, and shares were valued accordingly. After a dreadful earnings report, however, Alteryx’s shares plummeted. So far there has been little sign of a recovery.
In fact, Alteryx has been one of the worst-performing tech stocks in recent quarters. Shares went for $150 prior to Covid-19 and are at just $110 now.
What went wrong, and are Alteryx’s problem’s fixable? One point in Alteryx’s defense is that the company has on-premise business, and thus some of its sales were delayed or lost due to social distancing, whereas a cloud-only company would see an increase in sales.
However, that explanation is hardly enough to justify the drastic slowdown in Alteryx’s results and forward guidance. There are bigger issues in play as well.
Data Analytics King or Also-Ran?
A few quarters ago, Alteryx was the hottest thing in the data science and analytics space. Alteryx’s pitch was that the company could turn ordinary office workers into data scientists. By creating smart easy-to-use tools with accessible user interfaces, Alteryx would bridge the gulf between simple spreadsheets and wickedly-complex code.
For awhile, it appeared this formula was working. Alteryx was enjoying revenue growth rates north of 60% along with rising profit margins and strong client retention numbers. However, the wheels came off this past quarter.
Alteryx’s numbers from existing clients ticked down, new bookings slipped, and now Alteryx is guiding to just single-digit revenue growth in Q3 and potentially even a negative year-over-year number in Q4. That’s simply disastrous for a SaaS company in 2020.
To Alteryx’s credit, they have a history of guiding low and beating comfortably. So there’s still a chance of the company doing a little better. But things are not looking good at the moment.
Alteryx & The Lindy Effect
Remember that disruption isn’t a one-way street. Anything which can upend the existing market is likely to face substantial replacement risk of its own. Oftentimes, the easier it is to become the leader in something, the less likely it is that the lead will be durable.
This concept has a name: The Lindy Effect. The theory states that the future life expectancy of certain ideas, stories, and technologies is proportional to their current age. Every additional survival period implies a longer remaining life expectancy. Thus, the longer something has already been popular, the better its odds of staying relevant in the future. For example, the Bible will still be widely studied in 100 years. Harry Potter probably will not.
Which brings us to the matter of Alteryx. How long do we think that Alteryx’s platform will be one of the best solutions for data science? When you buy a stock at 16x revenues, the answer had better be pretty long. Because the company has to remain in business for a minimum of 16 years — and pay out 100% of revenues as profits to you — merely to return the price you paid up front. In most realistic scenarios, a company needs to survive even longer to generate decent returns for investors. The math is less severe if a company is still growing rapidly, but growth has evaporated at Alteryx.
Alteryx arguably doesn’t have the most feature-heavy product in its space, nor does it have the cheapest. So it’s not inherently clear why this should be the winning product for the long-term. And Alteryx was an overnight sensation, but that which arrives quickly can also burn out rapidly.
Meanwhile, its rivals such as Excel and hard coding have decades of history built up now and thus have staying power. Not surprisingly, once economic change hit this year, Alteryx’s prospects plummeted while more entrenched rivals held firm.
Alteryx Stock Verdict
That doesn’t mean Alteryx can’t be successful, but you have large players in the same space, such as Microsoft (NASDAQ:MSFT). There’s also new entrants with sexier alternative products such as Snowflake (NYSE:SNOW) and Tableau, which is now owned by Salesforce (NYSE:CRM). The idea that Alteryx is going to be the central storage ground for data — and where you process it from — doesn’t necessarily seem all that likely when you look at all the high-powered competition aiming at the same endpoint.
One of the worst situations an investor can get in is buying a formerly hot stock on the way down. It may seem “cheap” because we view it through the same lens it was previously trading at, but the fundamentals have shifted. Otherwise, the stock probably wouldn’t be down 40-50% in the first place.
It’s one thing if all SaaS stocks drop sharply. Then it’s just a sector correction. But when something like an Alteryx bombs out while its peers keep making new all-time highs, that’s often an indication of structural business problems. The stock should rally if insiders and tech experts think the growth story is intact. Instead, people have been hammering Alteryx’s stock into any rally since earnings. This is often indicative of a pattern where the experts in the name are steadily unloading to retail traders and generalists who arrive to the situation late hoping to find perceived value.
It may sound contrary at first glance, but in general, you’re better off paying more for a company that is firing on all cylinders than buying a tech company that has started to miss expectations. Earnings misses often come in bunches. And there’s still a ton of potential downside for a stock, such as Alteryx, trading at 16x sales.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
