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Altium Limited shares: Next stop $18?

Shares in software design business Altium Limited (ASX: ALU) tumbled 8% today after broker UBS reportedly put a “sell” rating on the stock and “share price target” not much above $18.

As a result more than 574,000 Altium shares have changed hands before lunchtime today, with volumes already exceeding their daily average as investors and day traders react to the news in their own ways.

Altium delivered one of the strongest half-year interim profit results of all the companies on the ASX last February, with earnings per share up 50% and net profit up 51% to US$14.9 million.

The group also grew sales 30% to US$60.3 million and paid an interim dividend of A$0.13c.

However, prior to today Altium traded on around 74x annualised FX-adjusted earnings per share, so it’s not hard to see why the broker concluded the stock was overvalued despite the strong growth the company is delivering.

The impressive growth is being fuelled by demand for its software services and products that support blue-chip industrial companies in designing electronic printed circuit boards (PCBs) that are required in a variety of everyday electronic devices.

Commonly the PCBs are required in electronic devices to help them connect wirelessly to the internet via what’s often described as the “Internet of Things”.

This means there’s strong underlying demand from global companies for Altium’s products that is likely to last over the long term. The underlying demand is what’s translating into the strong profit growth with earnings margins also rising in a classic sign that this is a business for smart investors to share ownership in.

Altium is also commonly touted as a takeover target given its strategic position and already strong business relationship with French software design giant Dassault Systemes.

The company of course comes with plenty of risks though, alongside a sky-high valuation that explains the volatility in its share price.

As an investor I wouldn’t pay today’s prices for its shares, even after UBS’s downgrade and rate the stock a hold ahead of August’s full year results.

Other tech stocks looking overvalued to me at the moment include WiseTech Global Ltd (ASX: WTC) or consumer credit star Afterpay Touch Group Ltd (ASX: APT).

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Motley Fool contributor Tom Richardson owns shares of Altium.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and WiseTech Global. 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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