Altium Limited (ASX: ALU) shares had a mixed day on Tuesday.
The electronic design software provider's shares ended the day a fraction higher at $36.70.
While a gain is always welcome, this was well short of what the ASX 200 index recorded. The benchmark index rose 0.45% to 7,339.7 points.
Should you snap up Altium shares?
The team at Goldman Sachs has been running the rule over the technology company this week.
And while it sees plenty of value in Altium shares, there's just not quite enough for the broker to recommend it as a buy.
According to the note, its analysts have retained their neutral rating with a trimmed price target of $41. This implies a potential upside of almost 12% from current levels. And if you include the 1.6% dividend yield it expects in FY 2023, the total potential return is over 13%.
What is the broker saying?
Goldman highlights that Altium has been on a hiring spree. While this could be interpreted as a positive, its analysts fear that it could pose margin risks in the current environment. Goldman explains:
Linkedin data shows +18% employee growth at Altium over the last 12m (vs. +3% LFL in FY22), which although consistent with 1H23 commentary, will likely limit any margin expansion for Altium in FY24 (GSe -47bps, VA consensus +115bps).
[W]e believe consensus under-appreciates the impact ALU's increased investment into softer revenue environment will have on FY24 profitability, with -6% downside risk to EBITDA expectations (GSe US$106mn vs. Cons. US$113mn).
Goldman then concludes:
We remain Neutral: Despite seeing downside risk to FY24 margin guidance (inline FY23), we believe current levels provide reasonable valuation support (trading on 1.8x fully capitalised EBITDA growth, vs. peer median c.2x), and continue to see M&A as a potential upside risk.
