Altair Stock: Too Expensive For Far Too Little Growth
In the ever-evolving landscape of the stock market, finding a balance between growth and value is paramount for investors. As we navigate through periods anticipating Federal Reserve rate adjustments, the allure of stocks situated at the summit of historical performance metrics captivates many. Guided by the principle of investing in companies boasting a robust growth trajectory at a reasonable price, a meticulous evaluation becomes essential.
Altair Engineering (NASDAQ:ALTR), however, presents a compelling case study of a discrepancy between market valuation and intrinsic growth prospects. Best recognized for its pioneering contributions to computer-aided design (CAD) software and now venturing into the realm of “computational intelligence,” Altair seemingly aligns with technological advancements. Despite its year-to-date appreciation of approximately 20%, aligning closely with the broader market trends, Altair demonstrably lags in growth within the mid-cap software segment. This reality beckons a reevaluation of its stock from previous neutral positions to a recommendation of sell.
The core of the argument against Altair converges on its valuation. With share prices hovering near $99 and a market capitalization of $8.24 billion, when adjusted for cash and debt, Altair’s valuation reaches an enterprise value of approximately $7.99 billion. Yet, the anticipated revenue growth for the current fiscal year—pegged at 6-8% year-over-year—falls short of justifying such a lofty valuation. Even with pro forma earnings per share estimates suggesting modest year-over-year growth, the financial metrics hardly align with the expectations one might have for a company valued at nearly $8 billion.
Contrasting Altair with other software entities experiencing deceleration yet still achieving over 10% growth rates and trading at more forgiving revenue multiples further accentuates the valuation disparity. Such a juxtaposition underscores a broader market trend of rewarding certain stocks despite lackluster growth prospects, a phenomenon Altair seems to have benefited from, albeit unjustly.
A closer analysis of the company’s recent performance reveals underlying concerns. Notably, a mere 4.1% year-over-year revenue growth in the latest quarterly results alongside indications of future growth prospects failing to meet expectations for a significant acceleration paints a somber picture. Adding to the skepticism are declines in billings—a crucial forward-looking indicator for subscription-based business models—signaling potential challenges ahead.
While Altair has undertaken acquisitions aimed at bolstering its technological capabilities, these moves appear more geared towards technology acquisition rather than immediate revenue growth. Similarly, profitability measures, such as a marginal improvement in adjusted EBITDA margins, offer little in the way of alleviating concerns over the company’s growth trajectory and justify the premium valuation it currently enjoys.
In light of these considerations, the market’s optimism surrounding Altair appears largely unfounded. With limited growth catalysts on the horizon and a valuation that starkly contrasts with the company’s actual growth and profitability metrics, the rationale for investing in Altair becomes increasingly tenuous.
Although there exist potential upside risks, such as Altair’s success in the aerospace and defense sectors and the possibility of increased construction activity buoying demand for its CAD products, these factors alone do not suffice to counterbalance the inherent challenges facing the company. Consequently, the prudent course of action would involve a reassessment of Altair’s position within investment portfolios, veering towards divestment in favor of prospects with more favorable growth-to-valuation dynamics.
Ultimately, the case of Altair serves as a cautionary tale for investors, highlighting the importance of aligning market valuations with underlying business growth trajectories. In a market replete with opportunities, discernment becomes key to navigating the intricate balance between growth and value.
