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Here’s what this leading broker thinks about the Altium (ASX:ALU) share price

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The Altium Limited (ASX: ALU) share price has been out of form this week due to the release of a disappointing trading update.

Week to date, the electronic design software company’s shares have fallen over 9%.

What was Altium’s update?

On Tuesday, Altium revealed that it expects to report a 3% decline in first half revenue to US$89.6 million. This soft half was driven by extreme COVID conditions in the US and Europe and challenging conditions in China for licence compliance activities.

One positive, though, is that an improvement in trading conditions in the second quarter has led to the company retaining its FY 2021 guidance.

This is for revenue of US$200 million to US$212 million (6% to 12% growth) and EBITDA of US$76 million to US$89 million (38% to 42% growth), less the contribution from its TASKING business which is being sold.

Though, judging by the performance of the Altium share price since the update, it doesn’t appear as though the market is overly convinced it will achieve this guidance.

Will Altium achieve its guidance?

Goldman Sachs has been looking closely at Altium and has given its verdict on its FY 2021 prospects.

Goldman commented: “To achieve the bottom end of FY21 guidance ALU would require revenue growth of +15% in 2H21E (on 2H20). While we anticipate the macro environment for ALU will improve through 2021 based on well above consensus GS macro forecasts, there remain risks to the achievement of this.”

However, it believes weakness in China could be a stumbling block in the company achieving this guidance.

“Given our global forecasts for a strong macro recovery through 2021, it is possible that ALU’s recent downgrade cycle may be nearing an end. However, the 1H21 decline of 15% yoy in revenues from China is a concern as it is not clear if this is a temporary issue or indicative of emerging headwinds in this geography noting it contributed 30% of Altium Designer perpetual licence sales volumes and 11% of its subscription licence sales volumes in FY20.”

In light of this, and even though its price target of $34.30 implies a potential return of 21%, the broker has decided to retain its neutral rating.

Goldman plans to sit tight until a more detailed disclosure is available at its half year results in February.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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