I believe Altium Limited (ASX: ALU) shares could be worth holding onto for the long term at the software provider’s current share price of $28.19.
Businesses that are growing profit and are expecting long-term growth are contenders to deliver good compounding over time.
Altium is one of the world leaders in the electronic PCB software design space.
I think the company could be good to keep hold of for the below three reasons:
Growth of electronic devices
Altium points out that electronics are at the heart of all intelligent systems and printed circuit boards are central to the design and realisation of electronics and smart connected products. For example, electronics are responsible for 40% of a new car’s total cost, according to Altium.
Management says the electronic industry is ripe for disruption and that “Altium is well-positioned to disrupt the way electronic products are designed and manufactured”.
It’s estimated that the number of active ‘internet of things’ devices will surpass 25.4 billion in 2030. The company says this is one of the trends that is driving Altium’s growth. In my opinion, this could be a useful boost for Altium shares over the long term.
Altium claims to have the best PCB design tools and cloud platform for the electronics industry with “deep user-centricity and a proven ability to ‘out-innovate’ the competition.”
The business saw its underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) margin improve from 30.6% in the prior corresponding period to 34.1% in HY22.
Altium is expecting its underlying EBITDA margin in FY22 to be between 34% and 36%. By FY25 or FY26, it is expecting the underlying EBITDA margin to grow to between 38% and 40%.
By FY25 or FY26, Altium is also expecting it will have at least US$500 million of revenue and 100,000 subscribers. It’s thought by management that 95% of revenue will be recurring by FY25 or FY26.
As profit margins increase, it means that more of the new Altium revenue can turn into net profit for the business. I think that could make Altium shares more attractive.
The company’s ongoing levels of profitability also mean the earnings generated can be used to strengthen the balance sheet and pay shareholders growing dividends.
Strong balance sheet and cashflow
At the end of December 2021, Altium had US$195 million of cash. This was partly due to the US$33.3 million of operating cash flow the ASX tech share generated in the first six months of FY22. That operating cash flow figure of US$33.3 million was 78% higher than the prior corresponding period.
Altium can use that cash to invest in more growth, make acquisitions, and pay larger dividends. I think all of these could be good for shareholders.
In the HY22 result, the Altium board decided to increase the interim dividend by 10.5% to 21 cents per share.
One of the features of the Altium balance sheet is that it has no debt. I think that puts Altium in a good position in a world where the cost of debt is rising.
I think Altium is a quality business with very effective leadership. It has compelling financial metrics, a positive future, and useful tailwinds. That’s why I’m holding it in my portfolio for the long term.