Down 15% this year, why I'm not selling out of this ASX 200 tech share

Altium has been one of my best investments. I'm holding for the long-term.

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Key points

  • I’m a fan of the Altium business and I have no intentions of selling
  • Altium has returned to strong double digit revenue growth
  • It’s expecting profit margins to rise in the coming years

The Altium Limited (ASX: ALU) share price is down 15% in 2022 to date. But I'm not worried. I don't plan to sell my shares for a long time to come. I think the S&P/ASX 200 Index (ASX: XJO) technology share has plenty of long-term potential.

For readers who don't know what Altium does, the company describes itself as a multinational software business that focuses on electronics design systems for 3D PCB design and embedded system development.

While the Altium share price may be down 15% in 2022, it was actually trading a great deal lower earlier this year. It was down more than 40%, in fact. So shares in the company have risen by around 50% since that low point.

Volatility is normal in the ASX share market. I think that times of (hopefully temporary) declines can actually open up opportunities to buy shares. A lower price doesn't mean that the business has gotten worse – it's simply a reflection of what the market is willing to pay that day to buy shares. We don't have to accept that offer.

At the current Altium share price, I want to keep holding onto my shares in the ASX 200 tech company. Here are my key reasons why:

Return to growth

Altium has delivered plenty of growth for investors over the last several years. The impacts of COVID-19 caused a bit of a speed bump, but FY22 showed that the company had strongly returned to growth, with revenue rising by 23% to US$220.8 million. Octopart – a US-based electrical parts search engine – saw revenue growth of 85% to US$50 million.

Net profit after tax (NPAT) soared by 57% to US$55.5 million.

A significant number of technology majors now use Altium software, including Tesla, NASA, Microsoft, Amazon, Apple, Alphabet, Space X and so on. The world's increasing digitalisation is a useful tailwind for the ASX tech share, and Altium 365 – the company's cloud platform – is helping to win over customers. In addition, it opens up more growth avenues like manufacturing.

In FY23, Altium expects to grow its revenue by another 15% to 20% to a range of US$255 million to US$265 million.

Growing operating leverage

As Altium grows, it aims to increase its profit margins. This can help the net profit grow even faster than the revenue.

The ASX 200 tech share managed to improve its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin from 34.3% to 36.7% in FY22.

By FY26, the company aims to reach US$500 million of revenue, and the underlying EBITDA margin is expected to reach between 38% to 40%.

Another element that is helping the profit margin is a higher level of recurring revenue compared to total revenue. Recurring revenue was 75% of the total in FY22, up from 65% in FY21.

Shareholder returns

As Altium's profit and cash flow rise, it's able to deliver higher payouts to shareholders. For long-term holders, the growth means the dividends received are becoming pretty sizeable.

In FY22, the full-year dividend increased by 18% to 47 cents per share.

This is an attractive feature because it shows the ASX 200 tech share's leadership is thinking about shareholders.

Another thing I'm keeping in mind is that if I were to sell right now, I would end up giving a sizeable amount of the returns over to tax. So for me personally, it would be better to allow my Altium shares to keep compounding, especially considering the growth outlook still looks good, in my opinion.

Altium share price snapshot

Altium shares have risen 18% in the last month. Zooming out, we see shares in the tech company have lifted around 20% over the past 12 months.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has positions in Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Altium, Amazon, Apple, Microsoft, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. 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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