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Is the Altium Limited (ASX:ALU) share price in the buy zone?

It certainly has been a month to forget for the Altium Limited (ASX: ALU) share price.

Although the electronic design software company’s shares climbed 1.5% higher today, they are still down a sizeable 26% since the start of the month.

Are Altium’s shares in the buy zone?

While I’m not overly convinced that the market volatility has finished, especially in the tech sector, I do think that Altium’s shares are in the buy zone if you’re prepared to hold on for the long term.

Based on its long-term growth target and margin expansion targets, I estimate that Altium will post earnings per share of 36.8 U.S. cents (52.3 Australian cents) in FY 2019. This means that its shares are currently changing hands at approximately 39x earnings.

While this is clearly a premium to the market average and leaves it vulnerable if the market sells off high PE shares, I would argue that its long-term growth potential justifies it.

One key highlight in FY 2018 was the growth of its subscription pool for recurring revenue. This increased by 10% during the period to reach over 37,900 subscribers.

Management stated that the current run rate of growth in the subscription pool is consistent with what is required to achieve its 2020 financial goals. As a result, it remains confident that it will achieve its 2020 targets of US$200 million revenue and an EBITDA margin of 35% or better.

This compares to revenue of US$140.2 million and an EBITDA margin of 32% in FY 2018.

Furthermore, beyond 2020 the company is targeting 100,000 active subscribers of its flagship product, Altium Designer, before 2025. If it can achieve this management believes it will compel key stakeholders within the manufacturing and supply chain industry to support its agenda to transform electronic design and its realisation.

Insider buying.

I’m not the only one that sees value in Altium’s shares at these levels. A change of director’s interest notice reveals that its non-executive director, Wendy Stops, has been buying shares on-market today.

The director picked up 5,000 Altium shares for a total of $104,161.64 including brokerage. This brought her holding to a total of 45,000 shares.

While it may be best to wait for its annual general meeting next month before considering an investment, judging by this purchase it seems that Wendy Stops isn’t expecting any negative news to surface.

All in all, I think this could mean it is worth looking at Altium’s shares along with fellow beaten down tech star Appen Ltd (ASX: APX) when the market opens again on Monday.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium and Appen Ltd. 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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