Alteryx (NYSE:AYX) reported good earnings for Q3 but it gave guidance for Q4 revenue and earnings that does not mesh with its high valuation. AYX stock trades at 177 times this year’s earnings and 147 times next year. This valuation is not sustainable if the company has essentially lost any sense of acceleration.
I pointed this out in my last article on AYX on Oct. 1, arguing that either the stock has to fall or growth has to accelerate. Since then, AYX stock has fallen 5.6% but I suspect now it has much further to drop.
Here’s the problem. After reporting a 24% increase in revenue year-over-year and 62.5% growth in non-GAAP net income in Q3, it gave very different guidance for Q4.
For example, revenue is expected to be between 4% and 7% lower year-over-year in Q4. And non-GAAP net income will be 20% to 30% lower than Q3 on a sequential basis.
So the problem is you can’t keep trading the stock at 177 times earnings with slow growth traits. The underlying issue is that clients are simply not willing to spend more money on data analytics during this pandemic season.
And you can’t expect the market to still pay up to 15 times this year’s sale and 12 times next year if revenue growth has essentially gone negative. You can’t expect the market to still pay up for this kind of a dip in sales.
Clients Are Holding Back
Therefore, I suspect AYX stock has much further to fall. Granted it has already fallen more than $33, or 23% since Nov. 5 when Q3 earnings came out. But the valuation is still unsustainable if the company’s clients continue to hold back increasing their spending on data analytics.
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.
But if their clients’ businesses are also having difficulties they may see data analytics as an expensive luxury. Alteryx will have to prove even more to them that their software is critical to achieving higher sales, not just save them money.
Why the New CEO?
During the quarter the company hired a new CEO. But the founder and former CEO, Dean Stoecker, stepped down suddenly on Oct. 5 without a very clear explanation. A member of the board of directors became CEO. This sudden move is usually indicative of some sort of problem.
Or maybe the former CEO knew more than he was telling. Maybe he foresaw the tough times ahead. He must not have felt equipped to deal with a high-valuation company with slowing growth.
Therefore, in my mind, this is a rather huge red flag. Given the valuation issues mentioned above and this red flag event, I suspect that most investors will want to take some pause.
It is also another reason why I think the stock does not have much upside for the time being. At least not until the company can guide for higher sequential revenue and earnings.
What to Do With AYX Stock
Analysts seem to think that the stock is worth considerably more than today. For example, TipRanks.com reports that seven analysts have an average price target of $162 per share. Yahoo Finance’s data indicates that the average of 13 analysts’ targets is $151.62 per share.
The point is that the sell-side seems to be very confident in AYX stock. However, most of these recommendations came out before the Nov. 5 disappointing guidance from the company. I wonder how many of them are going to stand by their recommendations now.
And of course, as you may know, I take sell-side analysts’ reports as a contrarian indicator. They usually get high growth-situations wrong, especially when growth has stopped or been delayed.
Therefore, I suspect most value investors and others who are cautious might want to take a pause before buying Alteryx stock. It might be the better part of defensive investing to wait until the company guides for higher revenue and earnings. Until then, AYX stock looks to be overpriced.
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.
Mark Hake runs the Total Yield Value Guide which you can review here.