If you were an early investor in Altium Limited (ASX: ALU), I'm truly jealous. The tech company is a world-class software provider for one of the most important components of our electronic devices, and has returned a whopping 1313% in just five years.
So, what's behind Altium's skyrocketing success?
A closer look at Altium
Altium is the creator of a design software for printed circuit boards (PCBs). Its flagship product is called Altium Designer, which provides engineers with a single interface to monitor the PCB design process from end to end. It also runs Octopart, a search engine for all PCB parts and pieces.
In its half-year report, Altium grew its cash on hand to US$58 million, up 11% since FY 2018. The company is debt-free, an impressive feat for a tech company with a 4.46 billion market capitalisation. It also has an attractive return on capital employed at 31%. This is significantly higher than the average in the software industry of 19%. Thus, Altium not only has a healthy balance sheet, it is also a highly capital-efficient business.
Why the Internet of Things means big business for Altium
According to Statista, the number of Internet of Things (IoT)-connected devices is set to increase from 26 billion this year to 75 billion in 2025. Similarly, the market for IoT technology itself is expected to double to $520 billion by 2021.
With all everyday devices requiring a PCB, the demand for Altium's products will invariably increase over the next few years. As the industry is still nascent, this indicates that this is only the beginning of Altium's explosive growth trajectory.
Foolish takeaway
Altium has a defensible business proposition that will benefit lucratively as the IoT grows in the years to come. It is also well placed to invest in future growth opportunities, with excess cash on hand and no debt. This includes investing in continued expansion in the US and China.
What I also find very appealing about the company is the commitment of the management team to hit ambitious targets. The company has dedicated itself to ensuring a 35% earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin, which is higher than the 26.16% industry average. It also has aspirational growth targets to achieve $200 million in revenue next year, and $500 million by 2025. Given its success to date, I have no doubt that Altium will be able to hit these goals.
Altium is currently operating on a 96.88x price-to-earnings (P/E) ratio. Though it is not cheap, it's the price to be paid for a company that is well placed to capitalise on future technology trends. The growth company has a track record of beating market expectations, opening the opportunity to buy into Altium's growth before its full-year earnings results.
