AYX - Alteryx's Mixed Investment Thesis Rule Of 40 In Question (Rating Downgrade)

2023-10-03 12:54:47 ET

Summary

• Alteryx, Inc. is determined to enhance sales execution, improve sales productivity, and implement cost-saving measures.
• And yet, Alteryx's revenue growth has been volatile, and reaching its Rule of 40 target by 2024 appears uncertain.
• Alteryx faces opportunities in generative AI and cloud-connected experiences but also challenges in customer buying behavior.

Investment Thesis

Alteryx, Inc. ( AYX ) is an analytics automation platform. It seeks to democratize data analytics, making it accessible to a diverse range of users, with different technological abilities to drive data-driven decision-making for different cloud environments.

As you'll see, this investment thesis is far from blemish-free. Indeed, there are plenty of detractions that make this investment thesis quite mixed. On the other hand, we have to also acknowledge that Alteryx has fallen significantly in value and isn't pricing in much in terms of investors' expectations.

On the other hand, and what I believe overwhelms this investment bull case, is that Alteryx appears to be on unsteady ground, with mediocre profitability.

Alteryx's Near-Term Prospects

Alteryx is an analytics automation platform, offering the Alteryx Analytics Automation Platform to empower organizations with the capabilities to democratize data analytics. This platform facilitates end-to-end automation of data engineering, analytics, reporting, and more, making it accessible to users of varying technical acumen.

Alteryx operates in a multi-cloud environment and enables data users to explore data, solve problems, and drive data-driven decisions efficiently.

It provides a no-code, low-code approach with visual workflows and an intuitive drag-and-drop interface, streamlining the often complex and resource-intensive data analytics processes.

Alteryx's mission is to enable enterprises to unlock actionable insights from their data and achieve top and bottom-line impact and efficiency gains for data workers.

In the near term, Alteryx faces a blend of opportunities and challenges. On the positive side, the company is well-positioned in the data analytics market, offering innovative solutions in generative AI and cloud-connected experiences. Its fair customer retention metrics, along with its success in serving large enterprise organizations, underline its long-term potential.

However, of late, the company has encountered challenges in customer buying behavior, particularly with significant expansion projects being delayed or downsized. Here's a quote from its Q2 earnings call :

[...] we saw a significant divergence from historical conversion rates in which customers opted to delay or meaningfully reduce new initiatives until the time of renewal. For example, we had over 10 large opportunities, which included both six and seven figure deals outside of the renewal cycle that delayed or closed at less than 50% of our expectation. This dynamic was particularly pronounced in the US region and resulted in a significant year-over-year decline in US bookings.

While we attribute the change in part to macro pressures [...]

Alteryx argues that this may have more to do with macroeconomic pressures and changing market dynamics, rather than something pertaining to its own offering.

Nonetheless, to address these challenges, Alteryx is determined to intensify its focus on sales execution, enhance its sales enablement, and implement cost-saving initiatives.

Definitely, adapting to evolving market conditions and improving sales productivity will be essential for navigating these near-term challenges.

With this context in place, let's analyze its financials.

Revenue Growth Rates Are Normalizing Away From Hyper Growth

Alteryx's revenues have been very volatile for some time. As a matter of fact, Alteryx recognizes the challenges in customer buying behavior . And yes, Alteryx emphasizes that it's determined to drive improvements in sales productivity, declaring that it believes it is uniquely positioned to navigate the market's transformative technologies, like generative AI, and to continue delivering value to its customers, with a focus on being customer-centricity and innovative.

The problem is that when we look beyond its narrative, I find it challenging to imagine that Alteryx will be able to reach the coveted Rule of 40 it seeks to reach in 2024, the target that Alteryx has put on itself.

Profitability Profile Leaves a Lot to Be Desired

Alteryx is determined to improve its profitability. However, its guidance for Q3 2023 points to around $10 million of operating income. Even if Q4 ends up being particularly highly profitable, as it stands right now Alteryx's long-term outlook appears unachievable.

Can Alteryx improve its non-GAAP operating margins from around ~10% it is hoping to reach this year all the way to 25% to 30% over any reasonable time frame?

Looking out to Q4 2023 Alteryx's Rule or 40, a measure of success between growth and profitability, perhaps reaches 25%. Can Alteryx reach 40% in 2024? It's possible, although I find it doubtful.

I find that there are too many questions and uncertainties in this name to seriously recommend this stock.

The Bottom Line

Alteryx operates in the analytics automation space, striving to democratize data analytics for users of varying technical abilities.

Despite its promise, Alteryx delivers a mixed investment thesis. On the positive side, it's well-positioned in the data analytics market, with innovative solutions in generative AI and cloud-connected experiences, and strong customer retention. However, it has encountered challenges in customer buying behavior, with significant expansion projects being downsized.

When considering Alteryx's financials, its revenue growth has been volatile, reflecting these challenges. While the company remains determined to drive improvements in sales productivity as it aspires towards its Rule of 40 target by 2024, I'm in doubt as to whether this can be reached.

Given these challenges and uncertainties, a cautious approach may be advisable when considering an investment in this stock.

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