Former market darling Altium Limited (ASX: ALU) has had a rough time of it lately.
The software firm's shares have come off about 30% from their 52-week high to trade at $28.67 at the time of writing. The Altium share price peaked at $41.82 in February 2020, just before the COVID-19 market crash.
So is this a buying opportunity, or has the business fundamentally changed in recent times?
Shaw and Partners senior analyst Jules Cooper admitted the coronavirus downturn "hit the business hard", but maintains its potential hasn't altered.
"I don't think they were having broader issues [when the pandemic hit]," he told the Direct From The Desk podcast.
"The business entered COVID with quite a lot of momentum — they were releasing new products and all was going swimmingly well."
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We've just turned bullish on Altium
According to Shaw and Partners portfolio manager James Gerrish, his team had only recently "turned bullish" on Altium shares, now well down from their highs.
Shaw and Partners now rates the Altium share price as a 'buy' with a price target of $34.
"We've always loved the company, the product and the management team — [but] it's just always been priced to perfection." said Cooper.
"Now I feel we have an opportunity to buy a very high-quality business run by a high-quality team in a big global market. And we don't feel like we have to wince when we put the recommendation on our research."
Cooper's team uses cash EBITDA to work out the price-to-earnings (P/E) ratio for a company like Altium.
On that metric, it is currently selling for a multiple of around 33 times. Achieving the $34 price target would take it up to 43, which is still well down on its all-time peak.
"If you look back to December 2020… it was trading almost 50 times cash EBITDA," said Cooper.
Arguably, purchasing Altium shares now could allow for the earnings to recover in the coming years as discretionary corporate spend picks up among potential clients.
Why COVID was so tough on Altium
Altium provides software that designs printed circuit boards, which are one of the building blocks for computers.
Cooper explained that when COVID-19 struck last year, Altium was in the midst of transitioning from an upfront licensing model to recurring subscriptions.
Such a change stings the bottom line for software vendors in the short term, but is more lucrative in the long run.
"It's unfortunate that they made this transition at a time when it was difficult for the business," said Cooper.
"But I find it quite amusing that people will not give the company and the management team the premium they deserve, that they've built up over a very long period."
Cooper predicts Altium will accelerate its shift to recurring revenue by funneling the clientele returning to the company post-COVID onto that model.
Altium has previously earmarked a revenue target of $500 million by the 2025 financial year. It last reported $268.4 million for the 2020 financial year.
