How Altium Limited just shot the lights out

Software business Altium Limited (ASX:ALU) is leveraged to the growth of the Internet of Things and is sitting in a growth sweet spot.

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There have been some strong profit reports this earnings season from the likes of healthcare giant CSL Limited (ASX: CSL), blue-chip insurer Insurance Australia Group Ltd (ASX: IAG) and kitchen-appliance business Breville Group Ltd (ASX: BRG).

However the strongest report to come across my desk this February is from software design business Altium Limited (ASX: ALU).

It just handed in earnings per share growth of 50%, net profit growth of 51%, and revenue growth of 30% to US$63.2 million for the six-month period ending December 31 2017. As a result the stock is up 19% to $17.70 in morning trade.

Altium is also expanding its operating income (EBITDA) profit margins that climbed to 30% from 25.8% in the prior corresponding half. The underlying EBITDA profit margin came in at 33.1% versus 29.7% in the prior period as it shows how strong revenue and profit margin growth can supercharge a share price and shareholders' capital gains.

The stock has now climbed 1,670% over the past 5 years and there could be more to come.

What's delivering Altium's success?

The company sells printed circuit board design software to help multi-national companies and smaller businesses build the electronic micro-chips (that look like mobile SIM cards) that are integral components of many industrial appliances such as computers, stereos, mobile phones, fridges, cars, airplanes, and thousands of other consumer or commercial electronic devices.

Altium's client list includes blue-chip companies like Microsoft, Hewlett Packard, Siemens, Phillips, Bosch, Bose, Audi, BMW, Toyota, NASA and hundreds of other household businesses that all need to manufacture the micro-chips assisted by Altium's design software.

The kicker is the Internet of Things, which is fuelling demand for these micro-chips in appliances that can then commonly be connected to the internet and remotely controlled via your mobile phone for example.

As such Altium's software design products should remain in strong demand into the future as companies need to manufacture more micro-chips in everyday internet-connected industrial devices.

Unfortunately, after last night's profit report Altium's success and potential is no secret and at $17.70 it changes hands on around 61x annualised FX-adjusted earnings per share.

That's expensive, but given it's tracking nicely to deliver US$200 million in revenue in 2020 on an EBITDA margin of 35% it could deliver EBITDA above US$70 million in just over two years' time. That compares to EBITDA of US$19 million reported for the six-month period ending December 31 2017.

Altium is a stock I've recommended multiple times over the past few years and I remain bullish on its outlook, although risks remain over the competitive environment in particular.

It also now sells for a premium valuations so buyers should be ready for heavy share price falls it if suffers setbacks on its growth trajectory. For now I'd rate it as a hold, although I expect to see it track towards $20 in 2019.

Motley Fool contributor Tom Richardson owns shares of Altium and CSL Ltd. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of Altium and Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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