Will the Altium Limited (ASX: ALU) share price hit $50 in 2020?
The electronic PCB software business saw its share price rise 3% yesterday to above $40.
Every year investor think that Altium finally is done beating the market's return annually. Yet each year it impresses with its results and sends the share price even higher.
It's certainly not cheap. It's now trading at 58x FY20's estimated earnings. Ouch.
Is today's price justified?
Altium sure looks expensive compared to the price/earnings ratio of a bank like Australia and New Zealand Banking Group (ASX: ANZ) or telco Telstra Corporation Ltd (ASX: TLS).
The thing is, Altium is a share that's generating strong earnings growth. In FY19 its earnings per share (EPS) increased by 41% and its operating cash flow rose by 42%. Due to the well-run operations of Altium and its accounting policies, Altium's free cash flow is noticeably better than the net profit it reports. So if you compare share valuations based on free cash flow it doesn't look as expensive.
Altium has an impressive record of growth over the past several years and it's aiming for strong growth to 2025 with goals of 100,000 Altium Designer seats, US$500 million of revenue and clear market leadership in the electronic PCB software space.
If Altium is able to get close to those goals over the next five years then its profit margins, profit and dividend will be much higher than what was reported in FY19.
However, with Altium already trading at 48x FY21's estimated earnings the market has already priced a lot of growth – it may have to beat the lofty profit expectations for Altium's 2020 total shareholder return to beat the market. But it's definitely possible it could rise to $50 considering there are some tech shares on the ASX at much higher valuations.
Is time to buy Altium shares?
I own Altium shares. I have owned Altium shares for a long time, it's my best performer by a long distance. I have previously sold a portion of my Altium shares when I thought it was expensive. It wasn't wrong, and I bought some back at a price a little lower than I sold, but I wish I had kept all my Altium shares until today.
There aren't many long-term performers out there that keep winning like Altium, Microsoft, Alphabet and so on. I want to hold on for Altium's growth journey. I wouldn't want to sell my Altium shares and face capital gains taxes, but I wouldn't want to buy shares today either.
