- Internet of Things and the explosion of PCBs in devices has helped drive Altium's (ALMFF) revenue growth to better than 20% p.a.
- Altium Designer continues to grow market share and subscriptions taking marketshare from competitors like SIEGY, CDNS and ZUKNF.
- Altium's margins are increasing to almost 40% despite the company investing in new business units like Octoparts, Tasking and Nexus.
- A PE of 84 has stretched the valuation too far and a PEG ratio in the 1.6-1.8 is not close enough to our preferred level of 1.
- Our recommendation is to wait for a 10-20% pull-back which would be around $30 Australian per share.
Our Global Technology Growth Star investment strategy does look beyond the US and today we look at an Australian company called Altium (OTCPK:ALMFF) although the ticker for the Australian stock market is ALU. Altium is one of Australia’s leading group of technology companies dubbed WAAAX in the mold of FAANG. Although WAAAX stocks are far smaller than their American brethren with market capitalizations in the $1-10 billion size bracket, their strong revenue and profit growth is worthy of coining an acronym. So we take a look to see if Altium’s exceptional stock market gains have run too far ahead of its results. Is Altium a quality company and is it a buy right now?
What do they do?
Altium’s main product is software design tools for printed circuit boards (PCB) called Altium Designer as well CircuitMaker, a community based PCB design tool for makers & hobbyists. ALU also offers NEXUS, an agile PCB design for teams and TASKING, a tool for embedded software development. If you are looking for a company that has been tied to the growth in IoT then Altium might be for you.
As a software tool designer for highly technical engineering work, Altium shares similar economics and clients with companies like ANSYS, although they don’t compete. Altium was originally founded in Australia in 1985 and is still listed despite moving the company’s headquarters to La Jolla, CA to be closer to its largest market.
Test 1: Strong growth for years
Multi-year revenue growth rate is our first filter and Altium has shown little sign of slowing as it approaches market leadership. In fact 2018 and 2019 have seen growth at rates of 26% and 23% which is higher than the 17-19% growth seen previously. ALU also reports for FY2019 that recurring revenue was 56.5% of the total.
Notes on timing and currency
It is also worth mentioning that Altium’s reporting year ends on June 30 as do most Australian companies. So figures for FY19 or FY2019 stand for financial year 2019 ending June 30. Unusually for an Australian company Altium however uses US dollars as its reporting currency yet still only provides six monthly updates, which is the standard required in Australia. All figures are US dollars unless otherwise stated.
Test 2: Profit growth, or imminently
Altium is growing profit with increasing EBITDA margins
We like software companies that increase their margins over time. That’s Altium, who has grown EBITDA margins to a healthy 36.5% by Q2 2019. That’s not quite Facebook yet, but it’s still pretty good.
Altium still gets most revenue from Altium Designer
Altium Designer, the professional PCB design tool, is easily the leading component of Altium’s revenue and profit growth as the figure below shows. Altium however is seeing strong growth rates for its Octopart business unit in particular with an impressive 49% p.a. 5 year CAGR (compound average growth rate). As Altium describes it “Octopart, a wholly owned subsidiary of Altium, is a component search engine that helps PCB design professionals find the right components for their designs by seamlessly integrating with Altium Designer 18.”
As IoT grows it makes more companies hardware designers, typically with limited experience in manufacturing. Octopart is the perfect tool for many small & medium sized product designers. The revenue isn’t material to Altium yet, but at 50% compound growth, it will be soon.
Test 3: Competitive Advantage
Growing market share is a good sign
Altium does have several competitors, yet it continues to win market share and according to trend lines and company forecasts looks set to move to the number 1 spot sometime in 2020. Taking market share whilst growing EBITDA margins to 36% in a technical field is a sign of a good product. Caution should be used on long term forecasts, but few can deny that Altium has carved a strong position second place, from a weak 4th place as recently as 2015. Challenging for top spot in 2020 for PCB design seems a given.
Quick competitor summary.
- Oregan based Mentor was bought by the German conglomerate Siemens (OTCPK:SIEGY) in 2016 for $4.5 B USD.
- San Jose based Cadence (CDNS) is Nasdaq listed with a market cap of about $18 B USD.
- Zuken (OTC:ZUKNF) is a Japan based specializing in software and consulting services for electronics and electrical engineering.
Powerful and innovative mid-market PCB design solution.
We aren’t a PCB designer, but based on a cursory search of comment boards the opinion of many was that Altium designer was a powerful and professional tool, yet less costly on an annual basis than one or two large competitors who didn’t focus only on PCB design. Altium’s PCB focus and frequent updates for its customer base was also considered an advantage over competitors who were considered to be less responsive in comparison.
Test 4: Is the Total Addressable Market (TAM) big enough?
According to Future Market Insights the global PCB design software market is anticipated to grow from US$ 1,409.3 Mn in 2016 to US$ 4,755.1 Mn by 2026. This represents a compound annual growth rate of of 12.9% in terms of revenue during the forecast period of 2016 to 2026.
Market size estimates such as this, combined with the company’s own competitive landscape estimates, make the 2025 forecast of $500 M USD in annual revenue seem achievable, in fact, based on current trends, there is a good chance of achieving this goal in 2024. Altium management has repeated beaten previous publicly announced goals for revenue and subscriber numbers by a tidy margin of 6-12 months.