AYX - Alteryx: Trying To Board The AI Hype Train

2023-05-26 04:30:32 ET

Summary

• Over the past few years Alteryx has built out an end-to-end machine learning platform and developed a cloud solution.
• Generative AI could be supportive of Alteryx’s focus on citizen data scientists, but the same capabilities are available to all vendors.
• Microsoft is an enormous threat to Alteryx, and even if Alteryx continues to be successful, Microsoft will likely cap the company’s success at a relatively modest level.

Despite registering strong growth over the past 12 months, Alteryx's ( AYX ) stock price continues to fall. Much of this is likely due to the heavy increase in sales and marketing expenses necessary to drive growth , but a questionable competitive position has also possibly contributed. The data analytics tools market continues to be fragmented and Alteryx's focus on business users leaves it vulnerable to Microsoft ( MSFT ). While Alteryx continues to spin a compelling narrative around democratizing access to advanced analytics capabilities, the lack of interest from potential acquirers at the current valuation is somewhat damning.

Market

Alteryx continues to highlight the need for better analytics tools for non-specialists, but at some point the company must demonstrate it can capitalize on the opportunity. For example:

• 90% of respondents said that under half of their knowledge workers use analytics software beyond spreadsheets.
• 63% of survey respondents said that their organizations are not using the full breadth of data types available.
• Less than 18% of organizations believe that their data access policies are moderately effective or better.

Potential customers apparently do not see the need for more sophisticated analytics tools though, or many must feel that the value proposition of platforms like Alteryx is not appealing enough.

While the long-term opportunity remains large, the short-term is becoming increasingly uncertain. Growth in IT spending is generally moderating, and Alteryx has not been immune to this. Alteryx observed a change in customer buying behavior later in the first quarter. Scrutiny on deals increased and sales cycles continued to lengthen, causing some deals to slip out of the quarter. Alteryx does not believe that this represents a material shift in competitive dynamics though.

Alteryx

Alteryx offers an increasingly comprehensive data analytics platform that is targeted at citizen data scientists. Solutions include:

• Designer - enables users to create data automation and analytic workflows.
• Server - scales Designer processes by allowing users to publish their workflows to the entire enterprise.
• Designer Cloud - cloud native version of Designer, which was made generally available in mid-February .
• Alteryx Machine Learning - enables business users to create and calibrate machine learning models through an easy-to-use guided experience.
• Alteryx Auto Insights - uses AI to analyze time series data.
• Location Intelligence - adds geospatial analysis capabilities.

AiDIN

Alteryx is capitalizing on the hype around generative AI with the launch of AiDIN. AiDIN builds on Alteryx’s low-code foundation and aims to empower business users. Relying on centralized data teams is generally a non-scalable approach, meaning that business analysts must be given independence in order to fully realize the potential of analytics. AiDIN aims to help organizations achieve this by abstracting the complexity associated with data analytics. This could potentially make Alteryx easier to use, increasing adoption and user productivity.

AiDIN appears to be positioned as something of a coordination layer that helps guide users through the analytics lifecycle, ensuring that accurate insights into business problems are generated.

Microsoft is also taking a similar approach in this area, and its distribution footprint makes it a formidable competitor. Fabric is an end-to-end analytics platform that integrates data and tools. At this stage it is not really clear to what extent Fabric represents genuine product innovation versus a marketing rebrand though, as it appears to be largely based on the integration of existing tools, like Azure Data Factory, Azure Synapse Analytics, and Power BI.

Microsoft plans on leveraging generative AI to help business users extract insights from data. This includes integrating Copilot into the service so that users can create data pipelines, generate code, build machine learning models, and visualize results using conversational language.

Financial Analysis

ARR increased by 25% YoY and revenue increased by 26% YoY in the first quarter. This was a large deceleration in growth from recent quarters, which was in part due to shorter contract durations impacting revenue recognition. ARR is a better measure of the performance of Alteryx’s business than revenue, although growth here is decelerating modestly as well. Alteryx is also guiding for a continued softening of growth over the course of 2023.

Alteryx’s dollar-based net expansion rate was stable at 121% in the first quarter, with the Global 2000 net expansion rate increasing slightly to 131%. Approximately one-third of Alteryx’s Global 2000 customers provide less than 50,000 of ARR . These presumably have the potential to be million dollar plus customers, providing significant potential upside.

Alteryx’s go-to-market motion is focused on the largest global organizations, as the company believes this is where most of the market opportunity lies. A focus on larger organizations is potentially impacting Alteryx’s customer count though, which has stalled in recent quarters. Management appears unphased by this as the average ARR of customers that churn is only around 15,000 USD . Alteryx’s customer is still relatively small though, and if the company cannot continue to attract new customers it will not be viewed favorably by investors.

The number of job openings mentioning Alteryx in the job requirements continues to decline, supporting the notion that adoption of Alteryx's products has stalled recently.

In addition to weaker growth, Alteryx also faces large losses due to the investments made in sales and marketing over the past 1-2 years. The company must begin to demonstrate operating leverage going forward or investors are likely to continue punishing the stock.

Alteryx is executing an 11% reduction in headcount to try and contain costs. This is expected to result in roughly a 11-13 million USD expense in the second quarter, but should result in incremental cost savings of over 40 million USD in 2023. Cost saving initiatives are primarily being targeted at sales and marketing and G&A.

Alteryx also recently completed a 450 million USD offering of senior unsecured notes. While this strengthens the company's cash position, it also raises questions about whether management's perception of the path to profitability has shifted significantly in recent months.

Valuation

The surge in growth from a shift in sales strategy has now dissipated, meaning Alteryx will increasingly have to stand on the strength of its products. With a range of new products on or entering the market, the next 12 months will be critical for Alteryx to demonstrate it has a viable future. If Alteryx does not witness an observable bump from the launch of its cloud service, it could contribute to negative sentiment regarding the stock.

While Alteryx’s stock looks inexpensive, a difficult macro environment and proximity to Microsoft’s core strengths could make this a value trap. With profitability seemingly still someway off and a lack of interest from potential acquirers, there may be little to support AYX stock price.

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