The Altium Limited (ASX: ALU) share price has been rising. In the last month, the ASX tech share is up a healthy 8%. Now trading at $45.65, it's 20% higher than it was six months ago and has more than doubled in five years. Can it reach $50 in 2024?
It's impossible to know for sure what a share price is going to do in a 12-month period. Anything could happen – investors could become overly bullish or bearish and drive a dramatic fall (or rise) in the Altium share price. But let's take a look at some figures.
Share prices follow profit
When a company grows its profit year after year, it's likely to help push the share price higher. If the price/earnings (P/E) ratio stays the same, then the profit growth should directly lead to share price growth at the same rate.
Altium's main offering is software used for electronic PCB design. The tech company also has other software, including the cloud platform Altium 365 and electronic parts search engine Octopart.
In FY23, the business achieved 19.2% revenue growth to US$263.3 million, net profit before tax growth of 29.3% to US$87.8 million and net profit after tax (NPAT) growth of 19.6% of US$66.3 million.
It has grown its net profit has grown significantly in the last five years and the next five years could also see good profit growth.
In FY24 alone, Altium expects revenue growth of between 20% to 23% to between US$315 million to US$325 million.
Share prices often don't directly track the profit change, particularly in the shorter term. But over the longer-term Altium's continued financial success can help shareholders.
By FY26, the company is aiming for US$500 million of revenue (and 100,000 subscribers), which could mean profit margins improve.
Does the valuation make sense?
Altium's long-term success is not exactly a surprise and the market is valuing the company accordingly. A business can become overvalued if the market is expecting too much too soon.
The broker UBS estimates Altium's earnings per share can increase every year between FY24 to FY28.
UBS suggests it could generate US 62 cents of EPS in FY24. This implies (after converting to Aussie dollars) that the Altium share price is valued at 49x FY24's estimated earnings and 27x FY28's estimated earnings.
Altium may well be able to rise to $50. It's only 10% away from where we are today. However, its forward P/E ratio will need to increase further if it's to reach $50 next year.
UBS certainly doesn't think it will reach $50 in 2024, with a price target of $40.60, suggesting the Altium share price might fall in the next 12 months.
I think Altium is likely to reach $50 eventually if revenue, margins and net profit keep rising. But it could take longer than 2024 to get there because the market is already expecting strong profit growth in the next year or two.
