Here's why the Altium (ASX:ALU) share price is 'significantly undervalued'

Altium shares have fallen and could now be significantly undervalued.

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Key points

  • The Altium share price could be significantly undervalued today based on management's comments
  • It previously rejected a takeover offer of $38.50 per share from Autodesk
  • The company is rapidly expanding its cloud operations with Altium 365 adoption by clients

The Altium Limited (ASX: ALU) share price could be "significantly undervalued", according to the people who know the business the best.

For readers that don't know, Altium is one of the leading electronic PCB design software businesses in the world. It also offers other services including Octopart, a search engine for electronic parts.

Is the Altium share price really good value?

The people who probably know the business best are the ones that work in the business, particularly management.

In June 2021, readers may remember that Altium received a formal, non-binding indicative proposal from US tech business Autodesk to buy the whole Altium business for A$38.50 per share.

Altium didn't go for the offer, it wasn't interested, though it appreciated the interest which evolved from dialogue about a strategic partnership.

The board said that the offer of $38.50 "significantly undervalued" Altium's prospects and rejected the other. At the time of writing, the Altium share price is $37.11. So, it's around 4% lower than the offer price which the board said significantly undervalued the business.

Since that takeover interest lapsed, Altium shares reached just over $45 by the end of 2021. However, it has dropped 17% since the start of the year.

Why is the ASX share undervalued?

The board said that Altium has a unique position in the electronics ecosystem. Its strong track record of setting ambitious long-term goals and achieving them gave the board confidence in its ability to pursue its transformative strategy.

Having successfully pivoted to the cloud through Altium 365, the company said it's well positioned to pursue market dominance and industry transformation.

The business says that Altium 365 is the platform for all software engineering disciplines to collaborate to design and build electronics for manufactured products.

At the company's AGM said that Altium 365 already has more than 17,000 active users and more than 7,000 active accounts. It also said that 15% of seats were on the cloud subscription and 40% were in transition.

What are some of the growth initiatives?

Management are working on several things to help grow the profit and the Altium share price.

The business is looking to accelerate adoption of the Altium 365 and Nexar ecosystem.

Another focus is scaling enterprise sales through strategic partnerships to expand its total addressable market within the PCB market.

Altium is rolling out its digital sales platform with the first US digital hub and taking the transactional sales global for expanded reach.

The next goal is expanding its Octopart total addressable market with its integration into Nexar.

The company is wanting to grow its licence compliance in China and, over time, generate recurring revenue through its Altium 365 China division.

Finally, the company is launching Altimade and lay the foundation for 'smart' manufacturing with a high profit margin.

FY22 expectations

At the AGM, Altium said that it had a strong first four months of FY22 with the core business growing well, Octopart outperforming, China and Nexus going well and Altium 365 cloud adoption accelerating.

It also said that it's confident that based on business momentum, it is not likely to be at the low end of its guidance range.

As a reminder, it's expecting to grow FY22 revenue by 16% to 20% to between US$209 million to US$217 million. The underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin is predicted to be between 34% to 36%. Annualised recurring revenue (ARR) growth is expected to be between 23% to 27%.

Altium share price snapshot

Altium shares are up 1% today and have risen 8.6% since the bottom of the recent decline on 27 January 2022.

Motley Fool contributor Tristan Harrison owns Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended 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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