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Is Altium worth $35 per share?

Altium shares drop ~10% following latest market update, RBC analysts say medium-term outlook remains strong.

Altium share price falls on market update

PCB design software and high-powered tools company Altium (ALU) today announced that its full-year revenue would likely come in below the current analyst consensus.

The response from investors was a decisive and unsurprising one: In the first hour of trade, the stock was bid as much as 10.29% lower, to $32.62 per share.

At the time of writing ALU traded at $33.44 per share.

Looking at the specifics behind today’s market release, Altium reported that as a result of the recent lock-down in Beijing as well as the spike in coronavirus cases across the US, the company’s run-rate has started to fall behind the analyst consensus.

The timing here is unfortunate given the period's importance to the company, with Altium’s management pointing out that it tends to close a significant amount of business during the back-half of June.

In addition to those Covid-related concerns, while the company noted that it was aggressively ‘closing sales’, its recently implemented volume over value pricing strategy – is also set to contribute to a drop off in anticipated FY20 revenue.

Altium's CEO, Aram Mirkazemi, noted that this strategy was aimed at supporting ‘our customers and to increase volume under COVID-19 conditions through attractive pricing and extended payment terms', adding that this will help the company to reach its key target of 50,000.

Mr Mirkazemi added that a new, less volume-oriented pricing structure will be implemented from 1 July onwards. Altium is set to provide the market with a full-year sales update in early July.

The analyst take

Looking at the sell-side response, though RBC analysts appeared disappointed by today’s downgrade – noting that it represents the fourth downgrade in the current calendar year; it was also pointed out that this ‘volume over value’ strategy could pay off in the long-run. Here, RBC analysts argued that:

‘Over time we believe ALU should be able to extract higher ARPU from new customers as pricing returns to “normal” levels; however, in the near term this presents a meaningful headwind to revenue and ARPU.’

'Medium term we like ALU’s positive attributes – a global, profitable technology company delivering high sales growth, high margins and net cash position,' RBC analysts said.

The bank currently has a Perform rating and a $35.00 price target on Altium, implying some upside following today’s pronounced sell-off.

Looking forward, 'We await a more attractive entry point,' RBC analysts said.

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