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Bull of the Day: Alteryx (AYX)

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Alteryx (AYX - Free Report) shares soared over 72% in Q2 out of the depths of the Coronavirus Crash, with most of that gain coming after their strong Q1 report delivered on May 6. As of July 9, the stock is up at least another 10% this month to new all-time highs above $185.
 
We'll go over the highlights of the Q1 report right after I re-introduce this amazing little company that my followers know I've been pounding the table on for the past year.
 
Alteryx is now a nearly a $12 billion maker of a data analytics platform that has become an invaluable asset to companies like Audi, Barclays, Dell, Pfizer and Unilever. In June of last year, I created a special video report, Big Data Chaos: How Alteryx Creates Raving Fans, and here is an excerpt from the article version...
 
Last Thursday (6/6/19) I chose Alteryx, the $6 billion "self-service" data analytics platform, as my target for a Zacks Bull of the Day feature to be published the next day. And I wasn't even aware that the $2.6 billion acquisition of Looker by Google Cloud that morning was the spark about to ignite my AYX shares 20% in a matter of days.
 
The next day, Friday June 7, Goldman Sachs initiated coverage of AYX with a Buy rating and $110 price target.
 
By the weekend, as I caught up with the implications of the Looker story, here were the notes I gave my TAZR Trader members on how M&A fever could heat up for other analytics "picks and shovels"...
 
After Google bought a private business intelligence (BI)/data analytics platform called Looker for $2.6 billion, or ~15X sales, the analyst team at D.A. Davidson put together a good summary of the deal and highlighted AYX as a clear potential target...
 
More Cloud M&A to Come?
 
The D.A. Davidson team, led by Rishi N. Jaluria has followed the Looker story closely for the past few years and has been impressed with the business, with a $100M run-rate and 70% year-over-year growth. Strategically the acquisition makes sense, especially given the integration between Google BigQuery, the company's cloud data warehouse, and Looker, and they have long expected Google Cloud Platform (GCP) to turn acquisitive under new CEO Thomas Kurian.
 
Some of the team's key observations...
 
While GCP has impressive technology, it has seen limited enterprise traction, especially relative to AWS and Azure, and they view M&A as an important part of GCP's strategy going forward. They also believe the acquisition may signal increased M&A appetite by the hyperscale cloud vendors (AWS, Azure, GCP) to buy more software companies.
 
The D.A. Davidson analysts also expect targets for cloud vendors to be more at the infrastructure, data, API, and analytics layers, as opposed to pure application vendors. Within their coverage universe, they view AYX and NewRelic (NEWR) as the most likely M&A candidates, with MongoDB (MDB - Free Report) and Okta (OKTA - Free Report) representing a "wish list" that may be less likely because of their high valuations. In addition, they continue to see an outside chance that AWS or Microsoft attempt to buy WDAY again.
 
Salesforce.com Throws Down vs. Google and Microsoft
 
Then Monday (6/10/19), Salesforce.com (CRM - Free Report) announced their deal to buy Tableau for $15.3 billion. And over those three trading sessions from Thursday through Monday, AYX shares vaulted from $87 to $106.
 
But the stock couldn't keep the gains as other i-banks like Wedbush and Raymond James were less enthusiastic with Neutral and Market Perform ratings on AYX, believing that valuation and competition should keep investors cautious.
 
(end of excerpts from my June 2019 vlog Big Data Chaos: How Alteryx Creates Raving Fans)
 
As I learned more about Alteryx and its solutions for customers to "mine and model" their dark data -- see this video and article for more info -- I became convinced it could trade at a rich price/sales valuation of 15 to 20 times in a hot software market. But hot markets are full of volatility, with bubbles and crashes. So I told my followers to always buy it when it trades under 12X 1-year forward sales estimates and take some profits above 18X.
 
Here's what I learned last year that most investors and analysts just woke up to this year...
 
Alteryx CEO Dean Stoecker, who founded the company in 1997, embodies the company mission to democratize analytics for what he calls the "citizen data scientist." Searching for this term, I found it actually was coined by Gartner, who defines a Citizen Data Scientist as “a person who creates or generates models that leverage Predictive or Prescriptive Analytics but whose primary job function is outside of the field of statistics and analytics.”
 
Stoecker's mission is to get 50 million data workers out of "spreadsheet hell" and into fast-moving tools that can help them find, collect, clean, blend, crunch, analyze, "munge" and share their data in the most efficient and powerful ways possible.
 
He even recognizes after 2 decades that data science is a social process, not a dry, abstract numbers-only game. Discovering data insights actually brings people and teams together in exciting collaborations to drive their work and business.
 
I also found a good interview with him on MadMoney in March of 2019 where he explained this quote...
 
"If the world is going to get eaten by machine learning, people aren't going to need visualization. What they're going to need are pipelines that allow you to deploy ML algorithms without writing any code."
 
Stoecker emphasizes how the Alteryx platform is in the middle of the software stack between data providers and data users. They can be agnostic to any integration because they provide power tools -- actually, the engine -- to get any data job done for any platform.
 
Software Thrives in the Pandemic Economy
 
It's not just that software became more vital than ever in this new normal during the pandemic. It's also that investors became much more willing to pay over 20X forward sales estimates for these companies, as AYX now trades up here in the "softosphere" vs next year's projected revenue consensus of $641 million.
 
But that top line would represent nearly 30% annual growth. And despite profits getting cut nearly in half this year to just $0.49 EPS, AYX will still be a Rule of 40 favorite -- sales growth + profit growth exceed 40% -- as the bottom line revives by more than double into next year.
 
In fact, after the AYX Q1 report, next year's EPS consensus moved from $1.00 to $1.02.
 
As the March and April quarterly reports for softosphere companies rolled in, we got confirmation that business was as good as ever, and in many cases, better than ever.
 
Here's some of what Dean Stoecker had to say on the May 6 earnings conference call...
 
"In Q1 we booked more than $107 million in total contract value, up 53% year-over-year. We posted $109 million in revenue, up 43% year-over-year. We generated $20 million in positive operating cash flow and exited the quarter with approximately $1 billion in cash and equivalents. We added 356 net new customers including 12 of the Global 2000 and now have more than 6,400 customers around the world including 37% of the Global 2000. Finally, net expansion remains strong at 128% overall and 140% for the G2K as we continue to see strong engagement levels within our larger customers."
 
Stoecker then went on to describe the unique challenges of doing business during the pandemic shutdown and how companies found Alteryx solutions vital across many diverse industries. "For example, in Q1 in the heavily impacted travel and hospitality segment, we did business with Australia Leisure and Hospitality, Caesars Entertainment, Choice Hotels, Copa Airlines, Graham Circle, Kurtz Corporation, Royal Caribbean Cruise Lines, Six Continents Hotels and Sun Country Airlines."
 
He also noted new business in the energy sector, where Chevron USA, Dominion Energy Services, Mid-American Energy Company, Pacific Gas and Electric and Thai Oil all relied on the AYX data engine. I recall that Royal Dutch Shell was a customer story in 2018 where they used data analytics models to predict when ocean drilling rig equipment would break down or need maintenance.
 
In the healthcare and biotech segment, AYX did business with Allergan, Pfizer, Eli Lilly Hospital Corporation of America and United Health Group.
 
In the telecom sector, AYX did business with Saudi Telecom Company, SoftBank, Telstra and Vodafone. They now count the top 10 telecommunications companies in the U.S. as customers.
 
"In healthy economic times, enterprises rely on data and analytics to be competitive. In the now uncertain times we find ourselves leveraging a data and analytics culture to make better decisions to survive let alone thrive is paramount. The COVID-19 pandemic is a reminder of how accurate and timely data and analytics provides the foundation for critical operating decisions and we saw this in action within our customer base.
 
"For example, an existing public sector client that needed to adapt quickly to the COVID situation purchased additional Alteryx licenses to analyze and measure the effectiveness of multibillion-dollar aid program. This sales cycle was started and completed in the last two weeks of March as those aid programs were announced."
 
Those seat licenses for the Alteryx platform can cost over $6,000 per year.
 
"In another example, a hospital leveraged Alteryx to quickly adapt their supply chain to source additional personal protective equipment for their frontline workers and first responders and built predictive models to understand the need for ICU beds."
 
Analyst Reactions: Way Behind in Grasping "The Power to Alter Everything"
 
Several analysts remained under-whelmed after the AYX report including the ones from Wedbush and DA Davidson, with these decisions on May 7...
 
Wedbush analyst Steve Koenig lowered the firm's price target on Alteryx to $138 from $146, but kept an Outperform rating on the shares. Koenig argued that although the company beat revenue targets slightly in Q1, forward visibility is murky, with management issuing "disappointing" Q2 guidance and pulling full-year guidance.
 
DA Davidson analyst Rishi Jaluria lowered the firm's price target on Alteryx to $110 from $145 and maintained a Neutral rating on the shares after its Q2 guidance came in "significantly below consensus." Jaluria noted that the company is likely being overly conservative, but also pointed to slower activity levels and higher churn reported in March.
 
Then on June 29, Goldman Sachs threw in the towel as analyst Christopher Merwin raised the firm's price target on AYX to $216 from $164. But he made this move based primarily on the interest rate environment whereby assumptions in the discounted cash flow component of his valuation methodology now propel increased price targets across the software sector.
 
Merwin noted that the "resiliency" of the sector throughout COVID-19 underscores the "criticality" of many software categories as businesses adjust for more distributed workforces and therefore require modernized cloud systems. With sector multiples at all-time highs, Merwin favors stocks where he sees "compelling relative value" and his best ideas currently are ServiceNow (NOW - Free Report) , Splunk (SPLK - Free Report) , Alteryx and HubSpot.
 
Bottom line on AYX: For me, the valuation is rich up here at 20X sales and the whole sector is due for another bubble popping sometime this year. But my research on how much Alteryx customers love the platform has always told me that it will not be replaced by what even giants like Microsoft or Google could duplicate. So sure, they could build their own data engines and are probably working on them right now. Meanwhile, some other big player might just be ready to pay $15 billion or more for AYX and get more than Salesforce got with the same money for Tableau.
 
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