Why the Altium share price is skyrocketing in 2019

The Altium Limited (ASX: ALU) share price is up over 70% in 6 months, but is there enough growth left to justify its lofty valuation?

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The Altium Limited (ASX: ALU) share price is up over 70% in 6 months, but is there enough growth left to justify its lofty valuation?

What does Altium do?

Altium Limited is market leading provider of printed circuit board (PCB) design software, which is a key component used in all electronic devices ranging from mobile phones to automobiles and aeroplanes. Altium's flagship product Altium Designer allows engineers and creators to design and customise their own printed circuit boards (PCBs), with high profile customers such as Audi, Tesla, Microsoft and Google.

Recent performance

The Altium share price jumped more than 20% on announcement of the company's "outstanding" half-year performance. For the half-year ended December 2018, Altium posted an increase in total revenue of 24% to US$78.1 million, along with an impressive 58% growth in net profit after tax (NPAT) to US$23.4 million. Other key highlights showed a strengthening earnings before tax, interest, depreciation and amortisation (EBTIDA) margin of 36.3%, compared to a previous 30%, and a healthy increase in operating cash flow to US$26.8 million. Altium's Boards and Systems segment continued to dominate the company's product mix, with Altium Designer 19 licenses and subscriptions increasing by 23% and 12%, respectively. Since the announcement, the Altium share price has continued to storm higher, reaching a record high of $36.90 just last week.

What's the outlook for Altium?

Off the back of its strong first-half performance, Altium CEO Aram Mirkazemi stated the company is "firmly on track" to achieve its 2020 revenue target of US$200 million, while maintaining an EBITDA margin of 35% or higher. It continually wins market share, hoping to reach over 30% market share by 2020 and over 45% by 2023.

At its current price-to-earning (P/E) ratio of over 64, it's hard to make a case for Altium Limited shares to be good value. On the other hand, bullish analysts argue that the P/E method may not be a reliable valuation technique for a fast-growing tech company; other high P/E software-as-a-service (SaaS) companies on the ASX have also managed to make tremendous gains in 2019, such as Xero Limited (ASX: XRO) and Appen Limited (ASX: APX), which are both up 52% and 137%, respectively. As a software distributor, Altium can achieve revenue and customer growth on an enormous scale without massively increasing their costs. It also has no debt, which curbs the issue of financial risk that plagues many up and coming tech companies.

Foolish takeaway

As more and more enthusiasts embrace the culture of build-it-yourself computers and DIY electronics, creators are looking for a much more personalised experienced. Altium may be prime position to benefit as people find new and creative ways to utilise custom PCBs in their products. So far in 2019, the market seems to agree.

All eyes will certainly be on the Altium share price as it prepares to release its full FY19 results on 19 August.

Motley Fool contributor Saran Likitkunawong has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium, Appen Ltd, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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