The S&P/ASX 200 Index (ASX: XJO) tech share Altium Limited (ASX: ALU) could become the clear leader in the world at what it does.
Altium describes itself as a business that offers software tools that empower and connect PCB designers, part suppliers and manufacturers to develop and manufacture electronic products faster and more efficiently.
One of the key areas of Altium is the cloud platform Altium 365. The idea is that it will enable collaboration across the entire PCB design process.
Altium Designer is one of the main software offerings, as well as the electronic parts search engine called Octopart.
With that in mind, there are a few reasons that could make the business a global winner.
Investing for the future with strong tailwinds
Altium's business model is changing, with "strong" platform adoption driving recurring revenue and average subscription seat price. The number of monthly active users and accounts on Altium 365 is increasing.
Altium is steadily growing its global PCB market share, but the competitor with the largest market share is losing its advantage.
More devices, vehicles and so on are becoming more advanced as time goes on. This is giving Altium a tailwind because electronics is "at the heart of a smart and connected world."
Altium points to 5G connections, electrification of cars, autonomous driving, industrial internet of things (IoT), AI and data science, mobile devices and the general demand for "smart connected products are driving demand for electronics and continue to overburden supply chain."
The company said that Altium 365 is increasing the attractiveness of Altium's PCB design software resulting in greater demand and competitive advantage.
Impressive financials
Altium possesses some financial characteristics that are good signs of quality for the business and could help the Altium share price.
The amount of the ASX 200 tech share's revenue that is recurring rose to 75% in FY22, up from 65% in FY21. That locks in more revenue for the next year and makes the revenue more sticky.
Altium had an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 36.7% in FY22, up from 34.3% in FY21. A growing EBITDA margin is an attractive factor, particularly if the revenue of the business is growing quickly. FY22 revenue rose 23%.
The company is very good at generating cash flow. In the FY22 result, Altium saw its net profit after tax (NPAT) reach $55.5 million (up 57%) while operating cash flow was $72.5 million (up 17%).
Generating lots of cash gives the business ample funds to pay a good dividend, ensure a good balance sheet and pay for good research and development to design the next generation of software for subscribers.
Growth expected
The Altium share price has done well over the long term. But, with the company expecting earnings growth in the future, this could help drive the Altium share price further.
The ASX 200 tech share has some aspirational targets for FY26.
In FY23, it's expecting to generate total revenue of between $255 million to $265 million (up 15% to 20%). By FY26, it's hoping to reach $500 million – almost doubling.
It's hoping to reach an underlying EBITDA margin of between 38% to 40%, which means profit could grow even faster than revenue.
The business is also expecting to reach 100,000 software seats on subscription.
Altium share price valuation
According to Commsec, the business is valued at 60 times FY23's estimated earnings.
