In recent years, we haven’t seen too many tech stocks crash the way Alteryx (NYSE:AYX) did last month. After what was perceived as a soft earnings report, AYX stock fell 28% in a single session and another 10% the following day.
Investors haven’t yet bought the dip. AYX stock has gained just 1% from where it traded after that two-day decline.
To be sure, the earnings report did highlight some cause for concern. Tech investors don’t like to see decelerating growth, and that’s exactly what Alteryx is predicting over the remainder of 2020.
But there’s a key qualifier there: “the remainder of 2020.” We have little, if any, evidence that Alteryx’s growth story is done for good. The novel coronavirus pandemic is providing near-term pressure, but the long-term opportunity for this “Big Data” play remains.
At some point, investor focus will return to that opportunity. When it does, AYX stock won’t be priced at $110 for long.
AYX Stock Earnings Concerns
Second quarter earnings actually looked solid. Revenue increased 17% year-over-year despite pressure from the pandemic, which kept the company from closing some business. Alteryx even surprised Wall Street by delivering a modest adjusted profit, versus expectations for a loss.
The issue, however, was the outlook for the third quarter, in particular. Alteryx guided for full-year revenue of $460 million to $465 million. Wall Street was expecting $505 million.
Put another way, coming into the quarter analysts believed Alteryx would grow revenue about 21% in 2020. The high end of guidance suggests just an 11% increase — barely half what the Street was looking for.
The news is even worse just looking at the second half of the year. The high end of full-year guidance suggests the top line will be basically flat year-over-year.
In that context, the plunge in AYX stock perhaps isn’t all that surprising. Heading into the release, AYX was trading at about 24x 2020 revenue expectations. That kind of valuation generally isn’t going to hold if growth disappoints at all, pandemic or no pandemic.
That said, I still believe the plunge is an overreaction.
After all, Alteryx is dealing with the ongoing effects of the coronavirus pandemic, as management detailed on the Q2 conference call. Alteryx’s data analytics solutions are not cheap. Corporate customers unsurprisingly were focused on slashing costs and dealing with a host of short-term issues. It shouldn’t be a surprise at all that Alteryx is dealing with short-term pressure.
Admittedly, management didn’t see that pressure coming after Q1. That’s part of why investors reacted so strongly to the guidance for the second half.
But the second quarter was a literally unprecedented time. It’s not a shock that Alteryx itself was surprised by Q2 results. And unlike a lot of tech companies, Alteryx isn’t benefiting from “work from home” trends.
As a result, 2020 results and guidance don’t mean the Alteryx story is over. As normalcy returns, so will demand. Alteryx’s data analytics program is a must for any company. Yet as Luke Lango pointed out on this site, only 37% of the Global 2000 use the company’s platform.
That proportion is going to grow over time. No company of size can ignore “Big Data” — because its competitors aren’t. And with Alteryx the leader in its niche, there’s reason to see Alteryx getting back to its growth ways soon.
AYX Stock Looks Cheap
And if Alteryx can regain its past growth profile, AYX stock should rally because the new, lower valuation is not that onerous.
Based on the high end of 2020 guidance, Alteryx trades at about 15x revenue. That hardly sounds cheap, but it is given the company’s margins.
Alteryx generates gross margins over 90%. The long-term target for operating margin is around 40%.
Alteryx isn’t driving those kind of operating margins at the moment — but it shouldn’t be. The company is investing behind the business, in areas like research and development and sales and marketing. Over time, those investments will begin to recede, and margins will begin to expand.
Put another way, Alteryx could be highly profitable right now if it wanted to be. Wisely, it doesn’t want to be.
Before the Q2 report, investors were willing to be patient and wait for that margin expansion and profit improvement. If and when Alteryx gets back to driving impressive growth, they’ll be patient again.
All told, AYX stock certainly is cheap enough given its opportunity. And the opportunity still exists; Alteryx simply is dealing with a momentary speed bump. Once customers start focusing on the long term again, growth will return, and AYX stock will bounce back strongly.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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