Is Altium Limited (ASX: ALU) a millionaire maker share at today's price? Its shares are steadily becoming better value in my opinion.
Since the start of June 2020 the Altium share price has actually fallen by 13%. I think that makes the ASX share more attractive for long-term investors. It's still down by 24% from the share price at 17 February 2020.
Overview of Altium
Before I get into the current COVID-19 events and the valuation, I'm going to give you a quick rundown of Altium if you don't know what it does.
Altium is an electronic PCB software business that offers a number of products like Altium Designer, TASKING, Nexus and Octopart. Many of its products are used for the design of new products, devices and vehicles. Engineers use the software, from one-man engineer outfits up to multi-national organisations.
Some of the clients that use Altium's services are Tesla, Space X, NASA, Boeing, Lockheed Martin, John Deere, Google, Proctor and Gamble, CSIRO, Monash University, John Hopkins, Siemens, Cochlear Limited (ASX: COH), Boston Scientific, Microsoft, HP, Amazon, Disney, Apple, Fitbit, Qualcomm and Broadcom.
Altium also has an exciting product called Octopart. It's a search engine to find electronic components and industrial products – kind of like the Google for electrical parts.
The company has global diversified earnings. Around half of earnings come from the Americas, around a third from Europe, 14% from emerging markets and 7% from the Asia Pacific region. I think the Altium share price is interesting for Aussie investors because of the global earnings aspect alone.
The company is now trying to follow the 'rule of 50' where the percentage of revenue growth and its earnings before interest, tax, deprecation and amortisation (EBITDA) margin are at least 50%. For example, if it had a 38% EBITDA margin and 13% revenue growth then it would have met the goal. It may be hard to achieve the rule of 50 in FY20 due to COVID-19.
COVID-19 conditions
Altium recently announced its revenue and subscriber growth for FY20. Revenue and sales both grew by 10%. It fell a bit short of its US$200 million revenue target. There was a 14% increase in new Altium Designer seats sold and 17% growth of the subscription base to well over 50,000 subscribers.
The ASX share finished FY20 with a cash balance of more than US$90 million.
This update hasn't helped the Altium share price recover. But one of the main positives from the update was that the new cloud platform called Altium 365 now has over 2,500 companies using it with almost 5,000 active users. It's going to be things like Altium 365 that drive the company forward with COVID-19 still around.
To try to get customers to sign up in the last few weeks of FY20, the company gave them attractive pricing and extended payment terms. I think this was the right move – it's more important to win market share in the short-term and then charge those customers the full price in the following year when things have (hopefully) turned around.
Is Altium a millionaire maker share at this price?
At a share price of around $32.50, Altium certainly isn't cheap. It's trading at 59x FY21's estimated earnings.
But you shouldn't make an investment based on the next 12 months. It's the long-term that counts. Altium is aiming for 100,000 Altium Designer seats by 2025 which should assist the company to hit US$500 million of revenue. If the company achieves that revenue goal, it should come with a higher profit margin, stronger cashflow and higher dividends.
Altium has already made long-term shareholders big returns and it's priced quite highly, so I don't think it will make massive returns in the next five years. I think there's more growth to come after 2025 if it can achieve global market dominance like it wants to. It's that growth beyond 2025 that makes me think Altium can still be a good market-beater over the long-term at today's share price.
I'd prefer to buy shares under $30. That share price may (or may not) come later this year. COVID-19 may cause another selloff in the share market and the US election is quite likely to cause some volatility. I'll be very surprised if I haven't bought more Altium shares by the end of 2020.
