Technology

ASX tech stocks rebound strongly following yesterday’s rout: Is Altium now cheap?

Fri 13 May 22, 2:52pm (AEST)
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Key Points

  • All Technology Index up 4.02% at noon today
  • Block up around 12.58%
  • Altium is trading well below Morningstar’s fair value of $35.54

Despite Macquarie’s warning yesterday of a further -25% downside for local tech stocks, the sector has regained much of yesterday losses, with the embattled All Technology Index (XTX) up 4.02% at noon today.

While higher interest rates globally and persistent inflation has driven rate-sensitive tech stocks lower, local tech stocks came back with a vengeance this morning – following a major sell-down yesterday - with Block (ASX: SQ2) the star performer today, up around 12.58%.

Meantime, Xero (ASX: XRO), Nitro Software (ASX: NTO), Sezzle (ASX: SZL), Novonix (ASX: NVX), Megaport (ASX: MP1), Wisetech Global (ASX: WTC) and Altium (ASX: ALU) were all up between 3.62% and 8.09% at noon today.

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Is Altium now better value?

Up around 6% this morning to $26.71, Altium is currently trading well below Morningstar’s fair value of $35.54, while Stock Doctor’s fair value is a shade higher at $37.94.

Despite being regarded as one of the most overvalued stocks in the sector, Chris Baumgartner research analyst with Stock Doctor believes the circuit board design software maker is a star growth stock suitable for growth-orientated investors seeking exposure to an electronics-design software provider. 

During the first half of FY22, recurring revenue was 74% of the total revenue, up from 65% one year earlier, while annual recurring revenue (ARR) rose by 43% and is expected to reach 95% by 2025 (ex-China).

What does Altium do?

To the uninitiated, Altium’s core product is its printed circuit board (PCB) design tool, allowing electronic product designers to progress from concept all-the-way-through to final design.

Since launching Altium 365, a cloud-based platform in March 2020, the company has achieved both a higher-level of customer engagement and a lower customer churn with renewal rates of 99%.

The company has over 30,000 corporate licences and 54,394 users spread across - the Americas (48% of FY21 revenue), Europe (32%), Emerging Markets (14%) and Asia Pacific (6%).

Quality balance sheet & earnings

What Baumgartner likes about Altium is the company’s strong financial health rating with minimal external debt, operating cash flows rising 78% and cash (and equivalents) totalling US$195m.

Driven by stronger sales within its core printed circuit board business (up 16%),  annualised revenue for the (GR2) period was up 14%, while annualised earnings rose 105% versus the previous period.

In terms of outlook, management increased full-year revenue guidance to (US$213m-$217m) up from (US$209m-$217m) previously, representing a year-on-year (YoY) rise of 18% (at midpoint). 

By comparison, consensus is currently forecasting strong double-digit earnings growth during FY22.

Timing and value

Baumgartner suggests trend sensitive investors who follow technical indicators may wish to remain on the sidelines until a more favourable price trend emerges.

He also suggests opportunistic investors who believe the retracement is temporary, may view the lower price as a potential entry point.

Despite recent falls, with Altium’s share price down by around a third in 2022, Intelligent Investor reminds investors that the stock still doesn’t look cheap, on a multiple of around 50 times this year’s expected earnings per share (EPS).

Staggered entry

However, if management can execute plans to transform the electronics industry, this should, adds the fund manager bring the multiple down to around 30 over the next 2-3 years, with earnings likely to continue growing strongly for a while after that.

“Given the high rating and the market’s current mood, there’s no knowing how far the share price might fall in the meantime, so we’d recommend buying in parcels to leave room to take advantage of better opportunities,” says Intelligent Investor, which recently upgraded Altium to Buy (below $30.00).

Meantime, while the company offered no new commentary at the half year on being acquired, Macquarie believes the environment now looks more favourable for Altium to pursue its own M&A activity to support growth. 

The broker retains an Underperform rating and the target price decreases to $25.90 from $27.10.

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Altium share price: a three month snapshot.

Written By

Mark Story

Editor

Mark is an award-winning investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics, a diploma in journalism and has completed the Institute of Directors course. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content.

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