Shares of data analytics provider Alteryx (NASDAQ:AYX) have been hammered amid the recent tech sector meltdown, as a sharp rise in long-term yields has put significant downward pressure on growth stock valuations. From its early February highs, AYX stock has plunged nearly 40%.
That’s a steep drop in a stock that has very strong fundamentals. Ultimately, this drop will turn into a golden buying opportunity.
I’m not saying AYX stock will reverse course right now and charge higher. The tech sector selloff is a bloodbath, and bloodbaths like this tend to take some time to shake out. But, what I am saying is that Alteryx is a fundamentally strong company, and that relative to the company’s healthy long-term growth prospects, AYX stock is significantly undervalued today.
That means that if time is on your side, AYX stock looks like a great buy at currently depressed prices.
Here’s a deeper look.
AYX Stock: Hammered on Short-Term Fears
AYX stock has been hammered over the past few weeks because of fears related to a sharp rise in long-term bond yields. The basic thinking is that, as long-term yields rise, equity valuations will correct lower, because stocks and bonds are competing investment vehicles, so as bond yields rise, the required rate of return on stocks rises, too.
That thinking makes a ton of sense. And if yields were to rise forever, then I’d say growth stocks like AYX stock will keep plunging.
But yields aren’t going to rise forever. Instead, it looks like the 10-year Treasury yield will max out around 2% over the next few years.
Here’s the thinking.
Historically, the 10-year Treasury yield has very closely tracked the sum of the 3-month Treasury yield (a proxy for inflation which the Federal Reserve controls with its target interest rate) plus real GDP growth. This relationship is unmistakably strong. Importantly, the 10-year yield has historically never surpassed the 3-month yield plus real GDP growth unless during a time of significant economic contraction (and therefore, negative GDP growth).
The Fed has reiterated multiple times that they will not move on interest rates anytime soon. Thus, the 3-month Treasury yield will remain near-zero for the foreseeable future. Real GDP growth is expected to jump to 4% this year in a sharp “bounce-back” year. But normalizing out for Covid-19 noise, real GDP growth in 2022 and after is expected to hover around 2%.
Thus, normalized, the 10-year yield should settle around 2% and remain there for most of 2022 and 2023. We are at 1.5% today. By my math, then, yields have another 50 basis points to go over the next 24-plus months. That’s a slow and steady grind higher.
To that end, I think we’re close to the end of the surge in long-term yields. Once the bond market calms down, I fully expect growth stocks like AYX stock to bounce back.
Alteryx Still Supported by Strong Fundamentals
Ignoring interest noise for a second, Alteryx is still supported by strong fundamentals.
Data-driven decision making is the future of the business world. Alteryx provides an end-to-end platform, which enables this data-driven decision making, by giving enterprises the analytics and tools necessary to turn raw mountains of messy data into clean, actionable insights.
Importantly, Alteryx does this in a friendly, low-code, easy-to-learn and easy-to-use software environment. That is, you don’t need to be a data scientist or have a computer science degree in order to make use of the Alteryx platform. Alteryx enables regular Joes to make advanced data-driven decisions.
That’s big, because most companies don’t have big data skills. All the data scientists in the world are going to work for Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT), while only 6% of large companies and very few small businesses employ even a single data scientist.
So, as we pivot into a data-driven future, most companies are going to lean into low-code, easy-to-use data science platforms to help them make data-driven decisions. Alteryx is the best-in-breed provider of these solutions — and, to that end, the company is going to sell a lot of enterprise seats to its data science platform over the next several years.
The company just hit a rough spot amid the pandemic because businesses leaned up their budgets. But we have multiple highly-effective Covid-19 vaccines that are being distributed rapidly, and it increasingly appears that “normal” is coming back at some point in 2021/22. As “normal” returns, businesses will re-up their budgets, and the Alteryx growth narrative will once again fire on all cylinders.
So, all in all, the fundamental growth narrative underlying Alteryx remains promising.
Alteryx Stock Is Undervalued
I cannot tell you exactly when the selloff in Alteryx stock will end. But, what I can tell you is that — even after factoring in higher rates — Alteryx stock is woefully undervalued relative to the company’s long-term earnings growth potential.
Thanks to the company’s attractive positioning in the hypergrowth data analytics market, I see Alteryx growing revenues at 15%-plus pace over the next decade. The company’s business model is all software, so it’s highly scalable and lends itself to big profit margins in the long run. By 2030, I think it’s likely that EBITDA margins pop to 35%.
On those assumptions, my modeling suggests that AYX stock is worth at least $120 today.
Alteryx stock may not rebound back to those levels right away. But the fundamentals eventually and inevitably always win out. Thus, whenever this stock market bloodbath does end, I do think Alteryx stock will end up soaring back above $120.
Bottom Line on AYX Stock
The tech sector meltdown has created multiple great buying opportunities for long-term investors. AYX stock is one of the best stocks to buy amid this meltdown.
But it’s not the best growth stock to buy on the dip.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.