Data science and analytics have gotten some high-profile attention lately -- from investors and corporate accountants alike. Shortly after Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) dropped $2.6 billion on Looker, salesforce.com (NYSE: CRM) went even bigger and purchased Tableau Software (NYSE: DATA) for a whopping $15.7 billion. Someone obviously let the cat out of the bag: Big data is getting bigger, and making sense of all the digital information out there is a lucrative business.
That's why Alteryx (NYSE: AYX) is so intriguing -- not to mention that its stock is up over 750% since its public debut in early 2017 and that revenue is going at a better than 50% pace. Alteryx runs a lucrative business model, one that is only getting better with time.
Big data comes into its own
The once buzzy "information age" is now an almost archaic term, but it isn't as if the flood of information it described coming from the web has leveled off. On the contrary, it's proliferating like never before as the world goes digital. Hundreds of millions of new devices are being connected to the internet every year, and complex processes like AI, machine learning, and cloud computing are getting tasked with taking over increasingly crucial business operations.
Image source: Getty Images.
Awash in the data being generated by all those computers and systems, businesses and the people in charge of running them are in need of some help. Alteryx's software helps business analysts get answers that are buried within the data, and it helps end-users get a visual understanding of what it means. It's become a powerful business tool and a profitable investment motif. Just ask shareholders of Tableau and Splunk (NASDAQ: SPLK).
Alteryx CEO Dean Stoecker had this to say on the company's second-quarter 2019 earnings call:
"In our view, the recent business consolidation in this space is simply validation of what we've communicated for a long time. The data and analytics are core to every business worldwide. And while Alteryx has grown significantly in a relatively short period of time, or as I like to say, we are a great 20-year-old overnight success, we believe that we are still in the early stages of our maturity to fully capitalize on this massive opportunity. For example, based on our analysis, we believe there are approximately 8 million to 9 million potential Alteryx Designer users within the Global 2000 (largest 2,000 publicly traded companies) and we currently have less than 1% penetration within that population."
This is leading to plenty of new customers, and existing ones are increasing their dollars spent. At the end of the second quarter, customer count was up 34% year over year, and net dollar retention rate was 133% -- implying that existing users on average increased their spending with Alteryx by 33%. It's a powerful combination that is leading to exceptional growth and one of the best gross profit margins in the software business, let alone the business world in general.
Half Year 2019
Half Year 2018
Gross profit margin
Adjusted earnings per share
Data source: Alteryx. Pp = percentage point.
An eye to a buy, but for the right reason
Alteryx is an established, 20-year-old company enjoying a surge of interest in its product, and it has plenty of potential ahead of it. What could go wrong? For one, after a red-hot run pushing prices up over 120% in 2019 alone, this stock is an expensive one.
Since Alteryx barely runs a profit (on purpose, I might add, as many high-growth companies do to maximize their sales potential), investors are left with the subjective price-to-sales ratio to get a pulse on where the stock is. Valued at 28 times the last year's worth of revenue, it's a spendy price tag that assumes the company's torrid pace will continue for quite some time. For comparison, Salesforce bought Tableau for half that amount, and peer Splunk trades for 9.6 times its trailing-one-year revenue.
Splunk is a much larger big data business, though, and its sales growth "only" clocked in at 36% during its last quarter and carried a total gross margin of 77%. Thus, Alteryx trades at a hefty premium as investors are looking at the future potential rather than the here and now.
As is typical with high-growth stocks, though, expect Alteryx to be a highly volatile one. Risk-averse investors may want to steer clear, or at least keep the position a small one. As for everyone else, I recommend buying a little bit at a time, building out a larger position via smaller purchases on, for example, a monthly or quarterly basis. Be ready to keep your head in the sand as well. This is a long-term play, not a get-rich-quick scheme -- although Alteryx's returns so far as a public concern might argue otherwise.
In short, big data is only getting bigger, and Alteryx is a key player in helping the world make sense of it all. The company should be on investors' radars as more organizations around the globe adopt new digital processes and put Alteryx to work on keeping track of it all.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares), Salesforce.com, and Splunk. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Alteryx, Salesforce.com, and Splunk. The Motley Fool has the following options: long January 2021 $100 calls on Salesforce.com. The Motley Fool has a disclosure policy.
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