Date of Recommendation: December 17, 2019 Closing Stock Price: $97.40
Alteryx (AYX) stock should be considered for long term investment. Based on my characteristics for a successful software stack company, I expect the price of Alteryx’s stock to grow significantly over the next 5 years. This will be driven by their expanding product offering in an enormous addressable market. Their data analytics platform is deeply embedded and highly valued by major enterprises, particularly in the global 2000. The product is often described as a “must have” by data analysts with clear ROI tied to business outcomes. The leadership team is strong, led by a long-time founder and CEO. I expect the stock price to more than triple and exceed $325 within the next 5 years.
Financial Overview
As stated in this blog’s first principles, I will not spend time on deep analysis of the company’s financials. Not because these aren’t important as part of an investment decision, but I think product development, customer fit and addressable market are better determinants of future growth. With that said, I think that Alteryx is compelling from a financial point of view given past and projected performance.
Here are some high level metrics from the most recent quarterly report (Q3 2019) that I find appealing:
- Revenue growth of 65% year over year. Tracking for at least 54% revenue growth for FY 2019.
- High non-GAAP gross margin of 92%
- Positive operating income and net income on a non-GAAP basis, with analyst estimates for non-GAAP EPS to increase by at least 40% in 2020 and another 49% the following year.
- DBNER (dollar based net expansion rate) of 132%
- Ended the most recent quarter with 5,613 customers, a 30% increase year over year
- $986.5M of cash and equivalents on the balance sheet. Added $13.5M of cash so far in 2019.
On the downside, the stock is priced on the high end of software companies, but not at the extreme. Current P/S ratio is 17.7. Forward P/S to end of 2019 is 15.9 and forward 12 month P/S is 12.0. Current PE ratio is 521, with forward 1 year P/E of 119. I do like the rapid reduction in PE ratio, which should help maintain the P/S ratio over time.
Product Overview
From their web site, “Alteryx delivers an end-to-end platform that unifies the analytic experience. With Alteryx, business analysts and data scientists alike can discover, transform, model, and analyze data using a single governed, collaborative, and scalable enterprise analytic solution.”
The platform enables four flows in data analytics – data discovery, prep and analysis, sharing and collaboration and finally deployment.
These four flows are supported by the different product offerings within the overall Alteryx platform:
- Designer. Alteryx Designer addresses data preparation, data blending, and analytics (predictive, statistical, and spatial) into a single tool. This was Alteryx’s first product offering and is often the initial tool purchased by most customers.
- Server. Alteryx Server provides the ability for a team to deploy and share analytics results and collaborate on decisions. Server is often purchased by a customer after they have several users of the Designer tool.
- Connect. Alteryx Connect enables data discovery and cataloging. It allows users to easily find, manage, understand, and collaborate on the information that resides in the various data sources within an organization. Connect is sold as an extension to Server.
- Promote. Alteryx Promote helps analytic teams deploy more predictive models faster by eliminating the need to recode models for real-time application consumption. Data scientists can deploy custom R and Python models as-is, while citizen data scientists can deploy advanced analytics code-free from Alteryx Designer. Data models can then be accessed through a REST based API or code snippets for most major languages. Promote is also sold as an extension to Server.
Pricing for these product is listed on the Alteryx web site. Designer is listed at $5,195 per user per year, with add-ons for location and business insights data set subscriptions. Server is $58,500 per year for a single server with 4 cores. Connect can be added for $39,000 per year. Pricing isn’t listed for Promote, as it is a newer product.
Product Landscape
Gartner puts Alteryx in its Magic Quadrant for Machine Learning and Data Science platforms. Per the description, “These are software products that enable expert data scientists, citizen data scientists and application developers to create, deploy and manage their own advanced analytic models.”
As you can see, Alteryx has the highest position along the Ability to Execute axis. However, Gartner moved Alteryx lower on the Visionary axis in this report (Nov 2018), due to demonstrating less vision and innovation than other vendors in the prior year. Specifically, “Alteryx’s innovation scores were low, relative to other vendors in this Magic Quadrant. Alteryx is not a standout vendor in terms of automation and augmentation, deep learning or the Internet of Things (IoT).”
This comment is certainly concerning on the surface. However, I think Alteryx is buffered from this in two ways. First, their core use case within the enterprise currently revolves around data prep and basic analysis for business insights versus enabling hard-core deep learning. This is evidenced by the many customer use cases listed on their Community site. Most of these involve generating “descriptive and diagnostic” business insights from existing data sources, which don’t require newer machine learning capabilities to realize. This perspective is further elucidated by a slide from Alteryx’s Investor Presentation in mid-2019.
Gartner’s magic quadrant appears to focus on the area that Alteryx describes as “Predictive and Prescriptive”, representing just a portion of the overall set of platform use cases.
With that said, this Gartner Magic Quadrant was published in November 2018. Since that time, Alteryx has put more emphasis into enabling what it calls “predictive” analytics and automating the process of creating new models to generate insights.
The Promote offering enables teams to publish their analytical models. Models can be made available as an open API that can be queried by other applications, or the models can be exported into Python or R code that data scientists can utilize. Through Promote, semi-automated modeling is enabled (human reviewed).
The acquisition of Feature Labs in October 2019 brings new exciting capabilities in machine learning that will be incorporated into the Alteryx platform. Feature Labs is a machine learning startup that was launched out of MIT in 2018. It focuses on automating the creation of machine learning models and offers popular open-source libraries for data scientists. Feature Labs makes machine learning model creation more practical for businesses by focusing on feature engineering, which is the process of using domain knowledge to extract new variables from available enterprise data sources to feed machine learning models. The goal is to empower businesses to build machine learning algorithms faster and operationalize data science. This will help alleviate the talent gap within data science and accelerate the “time-to-value” associated with harvesting large data sets for meaningful business insights.
As part of their research at MIT’s Computer Science and AI Lab, Feature Labs co-founders, Max Kanter and Kalyan Veeramachaneni, developed an innovative set of algorithms to optimize the manual, time-consuming and error-prone process required to build machine learning models. In addition to automating the model fitting and hyper-parameter tuning process, Feature Labs’ differentiated platform automates the feature engineering and data prep process, resulting in significant increases in model accuracy and overall process efficiency.
Alteryx Press release, Oct 4, 2019
Data scientists have already downloaded Feature Labs’ open-source libraries for automated feature engineering over 350,000 times. Alteryx plans to continue to support the open-source community after the acquisition, which will build more credibility for Alteryx with hard-core data scientists and engineers. This should bring Alteryx back into position along Gartner’s Visionary axis in future reviews.
Finally, we can expect new capabilities from Feature Labs to eventually be woven into a monetized product offering of some sort. On a recent conference call, Alteryx CEO Dean Stoecker mentioned that this automated modeling capability would be too valuable to just incorporate into a free upgrade to an existing product, implying it could be monetized as a new revenue stream. This pattern of acquisition to product offering occurred after Alteryx’s 2017 acquisition of machine learning startup, Yhat, which became the basis for Alteryx Promote.
Total Addressable Market
Alteryx estimates a total addressable market for its offerings of $73B. This is made up of the $49B market for worldwide big data and analytics software spend, plus an additional $24B of potential spend from the estimated 47 million spreadsheet users doing advanced data prep who could be converted to an Alteryx toolset.
Another way to estimate the opportunity is to look at estimates of the inefficiency in the current analytics processes. This inefficiency is attributed to manual, repetitive tasks in data prep and analysis. By automating these processes through the Alteryx platform, enterprises would realize a savings of about $60B.
Customer Mindshare
To say that customers value the Alteryx platform would be an understatement. They are raving fans. This is probably Alteryx’s greatest strength and it enables an important expansion motion within established enterprise accounts. Rarely have I seen such glowing reviews of a software product.
If that is not enough, Alteryx stock recently experienced a sudden drop in price of almost 10% as a result of a rumor that Spruce Point Capital (a known short seller) was planning to publish a short position on Alteryx. It turned out this rumor was false and confirmed by Spruce Point Capital on Twitter. Spruce Point is actually very bullish on Alteryx and shared some quotes from their research with users.
Beyond the obvious, why is this important? This customer evangelism feeds Alteryx’s powerful “land and expand” sales motion. In the last couple of years, Alteryx has focused their sales efforts on the Global 2000 companies. They feel these companies are employing growing teams of data analysts to enable their digital transformation efforts. These data analysts are the day-to-day users of the Alteryx platform and are being challenged with harnessing large volumes of business data to generate useful insights to improve the business.
The sales effort to these G2K companies usually starts with a couple of licenses for Designer, through a short sales cycle of about 45 days on average. After these initial users realize value quickly from Designer, they socialize their success with other team members, who request their own licenses for Designer. Soon, this group of Designer users wants to share data pipelines, collaborate on insights and publish models. This leads to a license for Server, and then potentially Connect and Promote. You get the idea.
Alteryx currently has a presence in 34% of the Global 2000. While a large number are in North America, international penetration is strong and growing as well. Besides the breadth of companies across sectors, what else is notable is the existence of several “technology first” companies. Microsoft, Amazon, Oracle and IBM are all customers, who on the surface we would expect to push their own solutions for data analytics. Also, technology enabled companies like Uber, Facebook and Netflix are customers. These three in particular have a habit of rolling their own technology solutions, rather than licensing software from third parties. The adoption of Alteryx by these companies further highlights the value of the Alteryx platform.
As a result of this powerful land and expand motion and strong user affinity, revenue expansion metrics are very impressive. Overall dollar based net expansion rate (DBNER) is 134%, which is high. However, when narrowed to the Global 2000, DBNER rises to an eye-popping 143%. Further, cumulative spend for the largest 25 customers has grown 33x over the past 5 years. Few software companies achieve this type of expansion growth.
In addition to expansion within existing customer accounts, Alteryx has maintained very consistent growth in new accounts. The magnitude of new customer adds has not accelerated as the sales force has grown. However, management discussed this on a recent earnings call in response to a question from an analyst. In the last two years, sales efforts have focused on the Global 2000, which represent the biggest expansion opportunities, as discussed above. A 30% year-over-year growth in targeted customer adds, coupled with a 143% DBNER for G2K customers, will obviously continue to drive high overall revenue growth.
Finally, the Alteryx go to market strategy includes a comprehensive partner ecosystem. Anecdotally, I have heard that some of the larger consulting firms have entire practices built around facilitating Alteryx platform deployment in large enterprise customers as part of their digital transformation efforts.
Leadership
The Alteryx management team is led by CEO Dean Stoecker. Dean co-founded Alteryx in 1997 with Olivia Duane Adams and Ned Harding. Dean continues to drive the company’s execution and strategy on a day to day basis. He is viewed as a visionary in the data analytics space. While he doesn’t have a formal technical background (MBA and business degrees), his long tenure with Alteryx establishes his technical chops. Olivia is still with the company as the Chief Customer Officer.
Ned Harding is described as “the technology innovator behind the speed and capacity of the Alteryx engine and the creator of the self-service data analytics workflow.” He currently serves as an advisor to the engineering teams. He was the CTO until July 2018.
Other members of the senior leadership team with interesting backgrounds:
- Ashley Kramer, SVP Product. Formerly, Head of cloud strategy at Tableau and a technical program manager at Amazon. The experience at Tableau is relevant, as Tableau Prep has recently been been held up as a potential competitive threat.
- Alan Jacobson, Chief Data and Analytics Officer. Formerly led a team of data scientists at Ford to drive digital transformation across the enterprise. Was an Alteryx user and evangelist there. This “insiders” experience in a huge enterprise will be very useful and likely provides the playbook for the land and expand model.
- Scott Jones, CRO. Sales leadership roles at Tableau, SAP, and Business Objects. Scott clearly knows how to build and grow enterprise sales efforts in the data technology space.
Going Forward
Alteryx presented long term financial objectives at their investor day in June 2019. These included long term targets for spending levels and ultimately profitability margins. The timeframe has been loosely set at 4-6 years out, with the option to extend in favor of further growth investments, if warranted. The Alteryx team updated these in the most recent Q3 2019 earnings presentation.
As you can see, gross margin is very high at 91% in the most recent quarter. This falls in the long term target range already. R&D spending is in line currently, with Sales and Marketing and G&A spending targeted to come down over time. This makes sense as these areas should experience incremental efficiencies as the organization scales.
At long term target, operating margin will reach 35-40%, with FCF margin slightly lower at 30-35%. An operating margin this high will drive very favorable levels of profitability. On a Rule of 40 basis, Alteryx would perform well at these targets. At worst, if you use FCF margin for your Rule of 40 calculation (I have seen both), revenue would only need to beat 10% growth annually to exceed a total of 40. In the most recent quarter, the Rule of 40 calculation would yield a value of 65 + 3 = 68 (or 74 using operating margin). Given the factors covered above around the addressable market, product extensions and the huge expansion dynamics within enterprises, I would expect revenue growth to continue above 20% annually for many years, keeping the Rule of 40 calculation over a value of at least 50.
For all of these reasons, I expect an investment in Alteryx stock to appreciate significantly over the next 5 years. This stock represents an ideal buy and hold investment that will capitalize on secular trends for the next decade. I believe the stock price will exceed $325 by the end of 2024, representing growth of about 3.3x over the price at the time of this post.
