Alteryx (NYSE:AYX) posted better-than-expected third quarter results and management raised its full-year outlook. Yet the company's stock price plunged by more than 15% following the news. Should investors take this opportunity to buy Alteryx shares and gain exposure to the vast and expanding big data market?

Big data made simple

With its differentiating products, Alteryx is poised to capture attractive growth opportunities.

As enterprises have been digitizing, they have been generating and accumulating a growing amount of data they can leverage to make business decisions. For instance, supermarkets can optimize the prices of the items they sell based on customers' spending patterns. However, extracting relevant information from large and diversified sets of data often requires skilled employees with experience in computer science, data analytics, and business intelligence.

Alteryx's solutions simplify these complex activities. Employees without such specialized skills can leverage Alteryx's easy-to-use tools to manage and analyze data. The recent release of the company's new analytic process automation (APA) platform, which covers data management, automation, and analysis under a simplified offering, confirms that strategy.

The company estimates its market opportunity at $49 billion. And given management's forecast full-year revenue in the range of $481 million to $485 million, the growth potential seems significant.

Team working on computer with data analytics and charts.

Image source: Getty Images.

Challenges ahead 

Despite that exciting opportunity, the coronavirus pandemic has revealed uncertainties that persisted in the third quarter as customers have become more prudent with "higher scrutiny on spend" and "smaller deal sizes", according to CFO Kevin Rubin. That development suggests Alteryx's offerings don't represent an essential investment when economic uncertainties materialize.

Granted, the company posted better-than-expected third quarter results. Revenue grew 25% year over year to $129.7 million compared to the recently increased revenue guidance range of $126 million to $128 million. The top-line outlook disappointed investors, though.

Based on the midpoint of management's guidance range, revenue should drop by 5.5% year over year to $148 million during the fourth quarter, which seems worrying. However, looking at the company's revenue growth can be misleading because of the uneven annual revenue recognition of its multi-year contracts. Instead, annual recurring revenue (ARR) provides a better view of Alteryx's performance as ARR represents the value of subscription contracts, which ignores accounting rules that lead to Alteryx's volatile revenue recognition.

So compared to the anticipated revenue decline in the fourth quarter, the forecast ARR of $500 million at the end of the year corresponds to a much more exciting ARR year-over-year growth of 34%. Yet investors should remain prudent. 

Alteryx's ARR growth has been declining over the last several quarters (44%, 41%, and 38% in the first, second, and third quarters respectively). And the company's performance paled in comparison to the phenomenal triple-digit revenue growth the cloud big data player Snowflake generated last quarter.

Looking forward, that negative trend should continue as Rubin forecast ARR growth of at least 25% in 2021, compared to the anticipated 38.7% ARR growth in 2020.

The coronavirus-induced uncertainties explain that prudent outlook. But the company may be facing extra competitive challenges as it is still lacking software-as-a-service (SaaS) solutions. Customers must install Alteryx's products on their workstations and servers before using it, which represents significant additional friction compared to other cloud offerings big data players such as Snowflake, Cloudera, and the giant public cloud vendors propose.

Big data players' offerings differ, but Alteryx's modest relative performance and late cloud presence should have investors worried.

Valuation still corresponds to strong expectations

Following management's disappointing outlook, Alteryx's stock price dropped by more than 15%. Yet the market still values the company at a high enterprise value-to-sales ratio of 16.1, based on the midpoint of full-year revenue guidance.

Granted, Alteryx remains a growth stock given its differentiating offerings in the expanding big data market. But uncertainties will persist over the medium term. New CEO Mark Anderson took over last month, and the company has yet to present its updated strategy during its analyst day next spring. In particular, I'll be watching management's plans to offer SaaS solutions.

In any case, given the company's demanding valuation, the market is already pricing in strong long-term performance while ignoring those uncertainties. That means Alteryx stock is still not a buy for me.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.