2024-01-02 22:53:45 ET
Summary
- Altium is a leading circuit board design software company with a majority share of the market.
- The company is experiencing growth in both its flagship software and cloud-native service, Altium 365.
- Altium's integrations with other companies, and its focus on expanding its ecosystem, are driving its success and market share growth.
- Combined with equal financial performance and a lower valuation than peers, the investment opportunity is significant.
Introduction
Altium ( ALMFF )(ALU:ASX) is the company behind one of the best circuit board design software platforms in the world. In fact, assessing the PCB landscape suggests that Altium is the go-to for hardware design departments of 5 or more people (with a few open-source competitors viable for individuals and small teams). While far smaller and more niche than other enterprise focused peers such as Cadence ( CDNS ), Siemens ( SIEGY ), and Synopsys ( SNPS ), Altium has superior investor benefits due to the current valuation, growth catalysts, and operational improvements. Also, the smaller size does not come with undue risk burden, as Altium remains unleveraged, highly profitable in line with peers, and growth can offset the high valuation. I will be using Altium as my long-term exposure to CAD software, and this article will highlight the opportunity for investors.
Altium Designer and Cloud
Altium has been in the business of developing design software for over 30 years. The flagship product is known as Altium Designer, and holds a significant moat in mainstream engineering, or commercial stage product design (rather than innovation of PCB technology). As we all know, the tech industry is firing on all cylinders as innovations in automotive, data center, IoT, and power applications allow for secular growth beyond cyclical consumer device tech. And, one of the most important, and overlooked, aspects of the industry is how to take the innovative chips produced by companies like Intel ( INTC ) and NVIDIA ( NVDA ) and place them in a usable container. That is the value proposition that Altium leads in, and so the platform is now used by over 30,000 companies worldwide according to management.
Like most competitive software companies in the world, Altium is a SaaS provider with both cloud-native and offline software. The company is slowly pivoting customers to their cloud service, Altium 365, but the offline software side of the company is performing extremely well on its own. Total revenue growth for the firm has been over 15% annually over the past decade, and profits have grown far faster than that. As they take a measured approach to the cloud-native experience, I expect that this growth pattern will naturally continue. This is especially true as the company has only begun offering different pricing tiers over the past few years for enterprise and professional grade customers. The better pricing leverage for Altium Design will be the primary catalyst in the intermediate term, and development of the broader cloud service will allow for continued price-per-seat growth in the coming years.
Another catalyst for growth is the development of Altium’s supply chain ecosystem through Altium 365 integrations of Octopart and Nexar. As a cloud-native system, real-time data access and open collaboration will be the main drivers of uptake. For example, Octopart and Nexar used to create a marketplace for PCB parts and share data across global firms that hardware engineers need to finalize their products. Having access to this all on one platform is inherently valuable through ease of use and cost optimization. Adoption is increasing fairly quickly, and when combined with the integrations being added to Altium Designer, the company’s stickiness and longevity is becoming quite impressive.
Building Sustainability
One of the main factors of success I look for in small cap companies is their ability to expand and create lasting integrations with other companies and clients. A company’s ecosystem is what allows it to thrive or die in the future, so making a product exclusive or essential is what matters most. As an example, Altium provided integrations with product lifecycle management platforms such as PTC ( PTC ), Siemens, and Oracle ( ORCL ), along with CAD platforms such as Solidworks ( DASTY ) and Autodesk ( ADSK ). This even includes co-simulation and co-design capabilities with Ansys ( ANSS ), who are getting acquired by EDA (Electronic Design Automation) competitor Synopsys. If ties become friendly, the only main PCB design competitor will be Cadence, and an oligopoly can last for decades.
With the integrations, Altium management expects their “virtual monopoly” to expand, especially when considering their future goals for the platform. In particular, the company believes in leading the continuity of two particular aspects of the electronic component industry: concept and realization. While they are leaders in EDA or CAD on the digital side, current developments such as Altium 365 are allowing Altium to gain a lead in business realization. I find the odds likely that Altium will continue their success. Perhaps the success can be measured with a recent announcement that Altium has created an Altium 365 GovCloud suite for ITAR and EAR regulated services for federal departments. Now that the US gov is on board, then there is little in the way of continued global adoption. As Morningstar puts it:
Altium has been highly successful in taking market share in the design software market for printed circuit boards and we expect this to continue. Over the past decade, Altium has doubled its revenue market share among the top four providers to around a third. Altium has long focused on developing a feature-rich, yet easy-to-learn product, with mainstream appeal. Altium’s stated strategic objective is to dominate the middle of the market first and subsequently leverage this dominance to move to the high-end of the market. We have seen this strategy work elsewhere, such as with Autodesk, and believe Altium’s situation and outcome to be similar.
Quantitative Factors Support Qualitative Success
While the operational qualities of Altium are deserving of an investment case on their own, the financials provide even more supporting evidence. Profitable, growing fast, and no debt. What more do you need? Well, I can be more specific, using the table below as an example: revenues growth averaging 15%, EBITDA growth double that at 30%, and earnings growth at 3x revenue growth at 45% per year for 10 years. Altium is one of the best examples out there of the power of the Rule of 40 (15% rev growth plus 30% EBITDA margins). Factors that are going into the success include the product line expansions like Octopart, increases in average revenue per seat, and an increase in term based or subscription contracts instead of transactional sales.
While organic growth may slow as the market share expansion gains complete, there are still many other catalysts. Firstly, the electronics industry is still rapidly growing, no question there. This will likely keep annual organic growth above 10% even in a bear case. Then, other factors such as the increase in high value enterprise or pro subscriptions allows growth to average closer to the historical 15% or more annual rate. We already see rapid growth of customers opting for these more expensive plans, and this will just create a positive feedback loop of higher profits, longevity, and downside protection. Also, there has been weakness due to the Chinese market, and so it is best to take advantage of the momentary headwind.
Lastly, I will mention how I believe Altium is superior to more established peers Synopsys and Cadence. Mostly, it is a matter of growth. Cadence is increasing earnings per share by around 8% per year over the past decade, with Synopsis growing EPS around 17%. This doesn’t even include the fact that Altium offers even higher profitability across EBITDA and Net Income metrics than both peers. So why invest in companies growing slower at the same or weaker profit margins? Valuation comes to mind, but Cadence (77x GAAP P/E and 18x P/S) is valued higher than Altium (64x GAAP P/E and 16x P/S), and Synopsys slightly less (65x P/E and 13.5 P/S). I see no advantages to either at the moment, especially considering Altium is less expensive than normal and the others are more expensive by up to 50%.
Conclusion
Altium has proved itself to be a viable candidate for investment in the software industry, financially and qualitatively. While most fear the ASX listing as a reason not to invest, I expect returns to be far greater than the closest peers to tax, brokerage, and trading volume implications are mitigated. As such, I will be making Altium a key member of the tech portion of my investment portfolio. While I will not be making major lump sum investments, I have set recurring investments of small amounts of capital for the time being and I will rather strike during market weakness. As of the first day of 2024, it seems that profit taking is occurring, so I believe that an ALU:ASX price of $45 or less is my target price for accumulating.
Thank you for reading. Please feel free to share your thoughts in the comments.
For further details see:
Altium: A Profitable Opportunity In EDA Software