Cloud stocks have been on fire this year, but not every software-as-a-service (SaaS) player has been a winner.
Alteryx (NYSE:AYX), for example, left investors scratching their heads after shares of the data analytics software provider plunged 28% on its second-quarter earnings report and fell 10% the following session, wiping out nearly all of the stock's gains for the year.
Though the company beat estimates for the second quarter, its guidance called for growth to slow dramatically in the second half of the year. After revenue growth of 17% in the second quarter, management called for just a 7% to 11% increase on the top line in the third quarter and 10% to 11% increase for the full year, implying a revenue decline in the fourth quarter.
Given the sell-off, it's only natural for investors to think about buying the dip here. Is this a buying opportunity or a warning of longer-term challenges? Let's take a closer look.
What management had to say
Discussing the headwinds in the quarter on the earnings call, CEO Dean Stoecker said: "We observed notable changes, such as higher levels of scrutiny on spending across all sectors, resulting in longer sales cycles, smaller deal sizes and less favorable linearity in the quarter. Based on what we see today, we do not anticipate a material improvement in business conditions during 2020."
The company also noted higher-than-normal churn and challenges with smaller customers, or companies with revenue less than $100 million. Bookings in the quarter were flat, pointing to a slowdown in new business as its sales force has also been logistically challenged during the pandemic. Investors should also be aware that because of accounting rules, 35% to 40% of the revenue Alteryx books from new on-premise contracts is recognized in the quarter they start, with the rest spread out over the duration of the contract. This makes its revenue growth lumpy, and sensitive to new bookings. That helps explain the headwinds the company sees in the second half of the year.
Nonetheless, Stoecker remained optimistic about the company's long-term future, saying: "We believe that COVID is creating a longer-term tailwind for our business. Companies that lacked analytic rigor or those with data challenges sought out a quick ROI solution to help them adapt to rapidly changing business conditions." The CEO noted that Alteryx landed new customers in industries that have been severely affected by the pandemic, including hotels, food service, and retail. It also increased its use of adoption licenses, which give prospective customers an opportunity to sample its products, due to the uncertainty during the pandemic. Adoption licenses increased 60% year over year in the second quarter, and 100% from the first quarter, which gives the company a potential pipeline of new business down the road.
The long-term opportunity
Assuming management's guidance is correct, the rest of 2020 looks like a bust, but dip-buyers like to target growth stocks that sell off on short-term news, which is what seems to be happening to Alteryx. The company has been a market darling since its 2017 IPO, as the stock is up more than 600% since then. Alteryx is considered a leader in its sector by Gartner, and it claims 37% of the Global 2000, the world's 2,000 biggest companies, as customers, showing its prowess in data analytics.
Stoecker has estimated that there is a $24 billion market opportunity in data analytics, and Alteryx has so far penetrated just a sliver of it, as the company's revenue last year was $417.9 million, up 65% from the previous year.
Based on its last four quarters, the stock trades at a price-to-earnings (P/E) ratio of 16, making it very affordably priced compared to some of the other fast-growing cloud-software stocks like Shopify, Okta, and Fastly. Alteryx is also solidly profitable, with an adjusted net income of $64.6 million, a profit margin of 15%, or $0.94 per share last year.
Buy the dip?
The coronavirus pandemic is a black swan event for the global economy, and it's clearly having an effect on Alteryx and its customers. While it's disappointing that the company expects growth to be sluggish in the second half of the year, which is the busiest period seasonally, there's nothing in the update that seems to change the company's long-term trajectory or opportunity.
Alteryx is clearly facing some headwinds, but those challenges should lift as the effect of the pandemic fades. The need for data analytics software hasn't fundamentally changed, and the company is still grabbing market share from traditional, manual spreadsheet users, showing the market opportunity is still ripe with significant room for penetration.
With the stock down more than a third from earlier this month, this looks like a great opportunity for long-term investors to grab a piece of the stock. 2020 may be rough, but 2021 should be better.