The Altium Limited (ASX: ALU) share price has been quite stable over the last four months at around $8. But now I think it's trading at a good price to consider buying Altium for long-term growth.
Altium is the creator of electronic PCB software to help designers create the products of the future. Here are three reasons why I think Altium could be a good buy:
Large and diverse customer base
Altium's success is based on the success of its users. Altium has a number of different products to assist designers from large teams all the way down to one-man setups. By having PCB design solutions like Atina, Altium Designer, Octopart and Ciiva it can hit all the market segments.
Altium has a very impressive list of clients using its software. Some of the high-profile customers include: BMW, Toyota, John Deere, GE, NASA, Boeing, CSIRO, Cochlear Limited (ASX: COH), ResMed Inc. (CHESS) (ASX: RMD), Siemens, Microsoft, Lenovo and Dolby.
Sticky revenue
The Altium software is impressive and efficient, but it takes a bit of time to train a team to become used it. Once that team is trained it creates sticky revenue for Altium because it would cost a lot of training hours to move to another system. It's for this reason that Altium has high retention rates.
However, this also makes it problematic to take customers away from other software providers. Altium's software would have to be cheaper and better than competitors for a designer to make the switch.
Altium's software is cheaper and better rated, which is why Altium has grown its pure PCB market share to 16% at 31 December 2016 from 10% at 30 June 2015.
Excellent results
Altium has been delivering great results for a number of years, the result for the half-year to 31 December 2016 result was no exception. It reported 14% growth in revenue, 8% growth in profit after tax and 10% growth of the dividend.
This result was probably even better when you consider there were some one-off transactions and acquisition costs included in the figures.
As Altium gets bigger it becomes more profitable for each dollar it earns. This can be seen with the earnings before interest, tax, depreciation and amortisation margin growing from 25% to 25.8%.
Risks
The key risk to the Altium business is if a better competitor or technology came along. At the moment it's Altium doing the disrupting but that might not always be the case.
There is always a danger for investors to overpay for a growth stock, so today's price of $7.48 leaves investors with a bit of margin of safety compared to the price a few days ago.
Foolish takeaway
Altium could be one of the best growth stocks on the ASX over the next 10 years. It's currently trading at 23.7x FY17's estimated earnings with an unfranked dividend yield of 2.8%. I think now could be a great time to buy Altium shares, however if tech stocks aren't your thing then perhaps this stock would be a reassuring investment instead.
