The Altium Limited (ASX: ALU) share price passed Mars today on its way to more than $32 — up ~20%.
The catalyst behind Altium’s share price bounce was the half-year report which the company released to the market last night.
Altium is an Australian multinational software business that was founded in 1985. It now has offices globally in places like San Diego, New York, Boston, Munich, Shanghai, Tokyo and Sydney. Its software focuses on electronics design systems for 3D PCB design and embedded system development. Its services include Altium Designer, Altium Vault, CircuitStudio, CircuitMaker, TASKING and Octopart.
Were The Results Really That Good?
During the most recent half, Altium’s revenue lept 24% to $US78.5 million thanks to increases in its subscription and licensing services. Net profit rose 58% to $US23.4 million. You can see from the larger increase in profit relative to revenue that Altium’s business is highly scalable.
In my view, what really got the market excited were comments and the outlook from Altium’s CEO, Aram Mirkazemi.
“Altium is focused on achieving PCB market leadership by 2020 and market dominance by 2025,” Mirkazemi said. “We are picking up a gear with our transactional sales organisation to enable us to scale to 100,000 subscribers through a number of initiatives, including further systematization and greater account-based intelligence.”
He added: “We expect our subscriber growth to accelerate post 2020 once the impact of these initiatives comes into effect.”
Altium’s Share Price Versus Valuation
It’s very easy to underestimate the ability of an ‘expensive’ share to keep rising beyond your assessment of fair value. Altium has consistently caught me out. For years I’ve been looking at its valuation in awe and confusion.
It’s also easy to get hang your perception of value on what management says or does. By 2025 — a long way into the future — Altium expects to hit $US500 million annual revenue, which would provide some comfort for investors at today’s prices.
However, at the current $4.3 billion valuation Altium shares trade on a revenue multiple of around 19x, which is quite stretched to say the least. That’s why, at this valuation, it’s very unlikely I’d buy Altium shares.
Like all great companies, such as Constellation Software Inc (TSE: CSU), we have to pay up to have great companies like Altium in our portfolios.
But knowing that the sentiment driving Altium’s share price higher today will likely reverse sometime in the coming weeks, months or years, I’m happy to wait on the sidelines, for now.