Alteryx Stock: Buy While It’s Cheap (NYSE: AYX)

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Investment thesis

It is known that successful turnarounds can generate strong returns for shareholders, given that a company that finds itself in a downward spiral obviously loses a lot of its value in the short term. So, if the transformation is successful, the revaluation could generate disproportionate returns. A well known example is AMD (AMD).

This is what happened to Alteryx (NYSE: AYX) in the last few years. Nonetheless, there are several signs that the turnaround is gathering pace under the new CEO and leadership, resulting in a renewed sales organization and a pivot to the cloud.

While timing to market and predicting a stock’s bottom can be difficult, these signs may indicate that the company may still be successful (for investors) in the long term.

To analyse

I first covered Alteryx in 2020 when the growth slowdown had only just started, which in hindsight was a bit too soon. I covered Alteryx consecutively in May, where I argued that investors should give the new CEO time to pursue the new strategy and reiterated Alteryx’s progress a few months ago. This strategy was simply to focus on the bigger customers, but it required what the CEO called a different “stage experience” in his sales movement. Alteryx did indeed report some employee attrition earlier in 2021, but that has been resolved.

In addition, the new sales organization has stopped looking for 3-year agreements (which have been reduced by around 30%) in favor of one-year agreements, in order to be better compensated for the (realized) value offered. by Alteryx to its customers. The CEO said at a recent conference that Alteryx would often end up with a price increase of between 0% and 30%, for affected customers moving to a shorter contract. The CEO also said that this price change did not have a significant impact on revenue in 2021, but seemed to expect a somewhat larger (upward) impact in 2022.

The final point to mention is that, similar to UiPath (PATH) (which Alteryx also has a partnership with), Alteryx has focused a lot on educating investors to focus on ARR (Recurring Annual Income). ), which is simply the total value of the contract. (TCV) standardized for its duration of one year. Seen in this light, Alteryx’s slowdown was (almost) as exaggerated as Alteryx’s 2019 ramp-up, as ARR actually increased at a fairly constant rate over time (with less volatility than income).

Namely, Alteryx’s ARR growth rate over the past few years is approximately 30%. Although it dived a bit into the 20s about a year ago, Alteryx was able (slightly) to re-accelerate the growth of ARR. In early 2021, Alteryx’s new CEO set himself a relatively ambitious goal of re-accelerating growth to 29%, exiting 2021 at $ 635 million. Indeed, Alteryx announced in its preliminary results that it exceeded this target.

In summary, investors should note that ARR is indeed the “best” metric on which to judge Alteryx and that revenue growth is currently lagging behind ARR due to demand to sell a company. shorter contract term. For example, being able to bill a customer three times for a $ 130 contract will obviously generate more revenue (over a three-year period) than a single $ 300 contract. Ultimately, despite a few key leadership changes and employee attrition (both at the start of 2021), Alteryx achieved its goals for 2021.

I think a year ago when we reset expectations and set $ 635 million for ARR for the full year, many investors and many sellers said it was too aggressive. , but I knew we could do it, but we had to have a very detailed plan, and we’ll have the same at exercise stage ’22 and beyond because honestly at this stage and beyond , you have to lead a very tight ship, if you want to be one of the winners and we are confident that we can work hard enough to be one of the winners in this space. (…) So – and we’re going – I can’t wait to give you a lot more details on that in the call for results, because to really get to those numbers, big winners and good deals and the team is doing just what the team is supposed to do, go do what they said they were gonna do, go do it. Alteryx, Inc. (AYX) 24th Annual Needham Growth Conference (transcript)

Trifecta acquisition: accelerate the transition to the cloud (+ Hyper Anna, Lore IO)

The other big news from Alteryx in early 2021 was its new Cloud Designer product to move to the cloud. Alteryx recently announced that this product will launch next month, following some previous early access programs. While its adoption rate and potential ability to expand its TAM remains to be seen, ultimately the cloud product is all about delivering data analytics to customers wherever their data resides. Existing partnerships such as with Snowflake underline this further.

To that end, the big news for Alteryx in early 2022 is the rather large $ 400 million (in cash) acquisition of Trifecta (excluding the $ 75 million stock retention grants). In short, for Trifecta, this company has been operating in the cloud for two years already, which will dramatically accelerate Alteryx’s cloud journey and cloud engineering capabilities. For example, Cloud Designer will initially only be available on AWS (AMZN). Overall, this plays into Alteryx’s strategy to become the premier analytics platform, rather than just a one-off solution. Alteryx expects the acquisition to contribute $ 20 million to ARR 2022.

Some additional management quotes can be found here: “A new management team is charting a new course. I understand [Farmer’s] sentiment around past acquisitions, but we’re articulating a clear strategy on how we want to drive integrations. “

Are we done? No, we are not finished. We will judiciously integrate this acquisition, it’s a lot of people, it’s a lot of work. But we have to get good at chewing gum and walking at the same time. And the people that – the hundreds and hundreds of people that’s come on board come on board for the journey that we have ahead of us, these are the great things that happened to us in the rearview mirror, they come on board to exercise that l permission to build the appropriate platform, because they have already done so. Maybe companies like Cisco, SAP or ServiceNow or Palo Alto Networks are coming from companies like that to come and try their trade. And I think we have a great opportunity there. I think one thing I want – really important for us to grow in the future, we’re going to have to have more tech to sell, we’re going to have more people to sell them to, more personalities, isn’t- this not. So think, we’ve gone from selling a single product, Designer Desktop is the vast one – over 90% of revenue, to selling a multitude of products in about a month and over half. of them be delivered from the cloud. Alteryx, 24th Annual Needham Growth Conference (Transcript)

A few months ago, Alteryx had already announced similar acquisitions with Hyper Anna as good as Lore IO.

The acquisition of Hyper Anna will enable Alteryx to automate the end-to-end analytical pipeline, from data sources to AI-powered insights.

Acquisition of Lore IO provides Alteryx with the talent and technical know-how to leverage cloud-native elastic computing in Alteryx Designer Cloud and Alteryx Machine Learning, enabling customers to analyze large datasets for insight self-service.

Evaluation

Resetting growth expectations also reset Alteryx’s valuation, which fell to just 6x ARR. Note that Alteryx, as a software publisher, has gross margins of around 90%. While these margins will decline somewhat as the cloud becomes a significant fraction of revenue, the combination of high margins, consistent growth, and significant opportunity arguably means that Alteryx should be viewed as fairly. cheap at its current valuation.

For comparison, UiPath is rated at 24x ARR while increasing ARR to 58%. That’s 4x the valuation for double the growth rate. Smartsheet (SMAR) has an estimated valuation of 14x ARR and an estimated ARR growth rate of ~ 40%. CrowdStrike (CRWD) is rated at 30x ARR based on 67% growth. Okta (OKTA) is valued at an execution rate of approximately 24x with organic growth of approximately 40%. Veeva is rated at a 19x execution rate with only 26% growth. While Veeva’s comparison may be the best-case scenario, if Alteryx were rated as such, the stock would hit an all-time high.

A final check would be to extrapolate the growth rate of these companies over three years to see what their medium-term valuation would be (assuming there is no change in the share price):

  • UiPath: 6.1x
  • Smart sheet: 5.1 x
  • Crowd Strike: 6.4 x
  • Okta: 8.7 x
  • Veeva: 9.5 x
  • Alteryx: 2.7 x

Even if some of these comparisons grow much faster (and the extrapolation assumes a zero slowdown in the growth rate), Alteryx’s mid-term valuation will likely still be much lower. Obviously, the main risk would be a slowdown in growth, but a complete stall seems unlikely given the trends discussed above. As such, at some point in the future (for example, once contract duration issues go away and reduce the rate of revenue growth), the stock appears likely to rise to reflect Alteryx’s growth. .

Takeaway for investors

Alteryx’s new CEO and the rest of the new management implemented their 2021 plan with ARR growth of around 29%. But as the CEO said, Alteryx isn’t done yet, with the recent acquisitions just integrated, as well as the cloud transition just beginning.

While Alteryx has not detailed its 2022 plan and doesn’t appear to expect a hardware contribution from the cloud until 2023, the CEO is clearly optimistic about the company. Therefore, I would say investors shouldn’t be done with Alteryx either. Priced at “only” 6x the ARR, Alteryx, at its current valuation, could deliver solid returns for long-term investors.

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