Is the Altium Limited share price a buy?

The Altium Limited (ASX: ALU) share price has been one of the best performing mid-caps over the last few years. It has risen from $1.65 five years ago to today’s $21.71.

Shareholders who were lucky enough to own it during this rise, like me, have benefitted enormously. But the question for non-holders is, is it a buy today?

A share can go down in price and be expensive, a share can also go up in value and be cheap.

I don’t think any investor would call Altium cheap at the moment. It’s currently trading at 44x FY19’s estimated earnings, according to Morningstar analyst estimates.

Altium is one of those high growth shares that has a lot of growth baked into the share price. Even if you look at the estimate for FY20’s earnings Altium is trading at 36x FY20’s estimated earnings.

Looking further ahead than FY20 management believe that Altium can cement its place as the lead business in the electronic PCB market. A growing pie and a bigger share of the pie should lead to good results for Altium.

One of the key things that could justify Altium at today’s price is its rising profit margins. In its half-year result for the six months to 31 December 2017 its earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased to 30% from 25.8% the year before. Management have a medium-term goal of a 35% EBITDA margin. This suggests there is still a lot of profit it can create just by improving margins.

Altium is constantly investing into improving its products for its customers, which should mean higher revenue from each subscription over time and high retention rates.

Foolish takeaway

If Altium continues to grow its revenue at impressive double digit rates over the next five to ten years then today’s price could be good value compared to the market. In the last result its revenue increased by 30%.

However, there is a good chance that if its growth isn’t quite as good as the market expects over the next year or two, the price/earnings ratio could come down and it would be better value.

Therefore, I’d probably avoid Altium shares at the moment, I’d much rather buy shares of this top stock which is predicting profit growth of 30% this year, that’s why it’s in my portfolio.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. 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 Scott Phillips.

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