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  • Writer's pictureOwen

Internet Of Things Driving Altium

Updated: Jan 23

Summary

  • 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 market share 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.


Introduction


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.


Image: Caterer Goodman Partners based on Altium data.


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.


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