Is the Altium Limited (ASX: ALU) share price a strong buy? I'd say Altium has been a mixed big since the onset of the COVID-19 pandemic.
Looking at the share price movement, Altium shares dropped 42% during the COVID-19 crash at the lowest point. It's still down by 16.4% from the all-time high price in February 2020.
I think the electronic PCB software business is one to consider because of its high quality.
Recent events
It wasn't too long ago that Altium announced its FY20 result.
Revenue increased by 10% to US$189.1 million, the subscription base rose by 17% to 51,0006 and the number of Altium Designer seats increased by 15% to 9,251. Earnings before interest, tax, depreciation and amortisation (EBITDA) went up 13% to US$75.6 million and the EBITDA margin improved to 40%, up from 38.9%.
FY20 profit before income tax went up 12% to US$64.6 million, though profit after income tax fell 42% to US$30.9 million. There was a one-off taxation change that will allow Altium to decrease its effective tax rate beginning in FY21 to a run rate of between 22% to 25%.
Excluding that taxation change, normalised earnings per share (EPS) grew by 5% to US 42.45 cents and the dividend grew by 15% to AU$0.39 per share. That fall in the earnings growth rate probably justifies the volatility and decline of the Altium share price.
It was a pretty disrupted second half of the year. It decided to launch 'attractive pricing' to continue winning new customers over the last few months. Winning long-term market share is probably more important for the business than short-term profitability. However, it's important not to degrade the value of the software company's brand too much.
The most interesting development was the launch of Altium 365, which is the company's effort at providing its services through the cloud.
The current conditions and the accelerated roll out of Altium 365 is evolving Altium's revenue away from perpetual licensing and maintenance subscriptions towards term-based licensing and software as a service (SaaS) subscriptions.
Leadership restructuring
Altium recently announced that the whole business is pivoting towards the cloud, with Altium now split between 'cloud' and 'software', with each having its own leadership and organisational roadmap.
The goal is to make Altium's cloud business have a SaaS-liked organisational structure. It will also allow Altium to tailor its sales better to target clients.
As a result, Mr Sergey Kostinsky was appointed to the role as president who will be focused on driving high performance in the execution of all operational domains with a particular emphasis on the rapid development and adoption of Altium 365.
My outlook for the Altium share price
Firstly, it's impossible to know what's going to happen with shares in the short-term.
The upcoming US election could certainly throw up a lot of volatility and may open up some buying opportunities, so the Altium share price could be one to watch over the next few weeks and months.
I still think Altium is on the right path for reaching its long-term goal of market dominance over the next five years, even if the US$500 million revenue goal takes a bit longer. Its balance sheet and dividend continue to improve.
I believe it makes a lot of sense for Altium to focus on Altium 365. Online services is the direction that the world is headed. Altium needs to be able to offer the best software and access for engineers.
Remember that interest rates are now incredibly low. I think that tech shares that are growing can justify much higher valuations these days. I can't see interest rates rising for a long time.
The Altium share price is currently trading at 48x FY23's estimated earnings. That looks fairly expensive, so it's not a strong buy for me today. But if its revenue and EBITDA margin can keep rising then perhaps it's actually a pretty good long-term buy. However, I'd prefer to buy Altium shares at least 10% lower than today, so I'm looking at other share opportunities at the moment.
