Shares of data science and analytics firms Alteryx (AYX) have lost over 40% of their value in a matter of days. Granted, at its peak shares were up nearly 80% in 2020 to date, rallying in tandem with other high-flying software names as effects from COVID-19 forced many organizations to pick up the pace of their digital transformations, in which old and now-redundant operations get replaced by more efficient tech-driven ones. 

While the analytic process automation firm did top its own guidance in the second quarter, it was nonetheless a "disappointing" report card and second-half-2020 outlook, one that implies its fastest days of growth may be in the history books. That is no reason to offload this stock by itself, but investors would be wise to temper expectations going forward.

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Image source: Getty Images.

All that's digital isn't gold

First, it's worth noting that revenue growth of 17% -- in the midst of a pandemic and unprecedented economic lockdown no less -- is nothing to balk at. But big expansion is expected here as Alteryx runs at or close to a loss as it spends its way to maximum growth in lieu of profitability. Revenue of $96.2 million in Q2 generated negative free cash flow (revenue less cash operating and capital expenses) of $18.8 million. 

In fact, the final sales outcome was actually just over $1 million better than what Alteryx management had forecast. And paired with first-quarter results, first-half-2020 revenue was 30% higher than it was a year ago, building on the exceptional outing the company had in 2019. It's hard to argue for the nearly 80% run-up in share price in recent months, but the sudden reversal in share price is nonetheless surprising. What gives?

The problem is that Alteryx put full-year 2020 guidance back into place (it had withdrawn full-year guidance during Q1), and what was thought to be a single-quarter hiccup may not be anymore. 2020 expected sales of $460 million to $465 million represent just 10% to 11% growth. Rather than data analytics and automation picking up steam again as the effects of the pandemic wane, "only" 10% to 11% growth would imply the second half of the year will be far slower to offset the 30% growth notched so far. 

Reassessing the story

Now, Alteryx has a habit of under-promising and over-delivering, as do other subscription-based cloud software firms. It's more than possible that back-half sales are much better than currently anticipated. But it's nevertheless a far cry from where things were sitting at the start of the year, and even after the more-than-40% tumble shares still trade for a hefty 16.6 times trailing 12-month sales -- a premium that should only be accepted if double-digit growth will continue for some time and lead to a bigger bottom-line return later for this still currently unprofitable software company. 

I'm not counting Alteryx out yet. After all, it's hard to argue with a balance sheet that has $975 million in cash, equivalents, and long-term investments on it, and the need for analytics and automation of data will continue to rise in the years ahead.

However, management admitted that many of the industries that were putting its platform to use have been deeply affected by this crisis and are reassessing their spending. New deals were inked, but industries like retail, finance, and energy were being judicious in parting ways with cash, and deal sizes were smaller than in the past. Plus, it's not like Alteryx is without competition. According to data compiled by investment research tool Noonum, there is no shortage of similar offerings out there (Talend is one example), and many of them (like Microsoft and SAP) have broader sets of software tools to complement their data analytics offering. 

Add to the fact that after issuing a new round of debt to raise cash last summer (which, it should be noted, hasn't really been put to work), Alteryx now has $714 million in convertible debt. The company is in no imminent trouble, but it's not exactly a clean balance sheet, and shareholders stand to be diluted if the liabilities are eventually converted into stock. Paired with the sharp slowdown in growth and no visibility on when it might pick up again, this is starting to suddenly look like a mature tech company, not the young high-octane outfit it was just a couple quarters ago. 

Again, nothing wrong with that, but shares are still not reflecting that possibility. If the days of double-digit sales growth -- or even a rate of expansion in the teens percentage range -- is the new reality, it's time for shareholders to stop looking at the top line and instead start looking for some bottom-line return. Otherwise, Alteryx might be better off looking for a buyer among its larger data analytics peers.