AI Innovation And Tactical Expansions Propel The Company Into New Growth Horizons

Key Takeaways

• Altair's focus on AI and simulation-driven innovation in products like HyperWorks 2024 is expected to boost sales and maintain its market lead.
  
• Expansion into new sectors like healthcare, alongside strategic acquisitions and partnerships, diversifies revenue sources and strengthens market position.
  
• Altair's growth and margins are challenged by its need for continual innovation, reliance on partnerships, and vulnerabilities to economic and foreign exchange risks.

Catalysts

Provides software and cloud solutions in the areas of simulation and design, high-performance computing, data analytics, and artificial intelligence in the United States and internationally.

• Altair's emphasis on AI-powered, simulation-driven innovation with software product line enhancements, especially in products like Altair HyperWorks 2024, likely to drive future sales growth and maintain competitive edge, impacting revenue positively.
  
• Gaining leadership in data science and machine learning platforms as recognized by Gartner's Magic Quadrant, affirming Altair's strong position in the market and potential to attract more business, enhancing revenue and net margins.
  
• Acquisition of Metrics Design Automation, introducing a simulation-as-a-service model for semiconductor design verification, expected to disrupt the EDA space by lowering costs and accelerating design cycles, likely to fuel revenue growth and expand market share.
  
• Strategic partnerships and expansions, for instance with Hewlett Packard to enhance the Altair Material Data Center, aimed at overcoming 3D printing challenges, can open new revenue streams and strengthen the position in additive manufacturing, impacting revenue growth.
  
• Expansion into new verticals such as healthcare and life sciences, with significant sales growth in the data science domain, represents a diversification of revenue sources, potentially increasing overall revenue and stability of earnings.

Assumptions

• Analysts are assuming Altair Engineering's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $63.5 million (and earnings per share of $0.65) by about August 2027, up from $26.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $74 million in earnings, and the most bearish expecting $40.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 167.9x on those 2027 earnings, down from 286.5x today. This future PE is greater than the current PE for the US Software industry at 37.2x.
• Analysts expect the number of shares outstanding to grow by 4.49% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Risks

• Altair operates in sectors like aerospace, defense, automotive, and electronics, where economic downturns or budget cuts could impact revenue by reducing demand for simulation and engineering software.
  
• The company faces a continuous need for innovation and product development to maintain its competitive edge, which puts pressure on its net margins due to the high costs associated with research and development.
  
• Expansion into new verticals like healthcare and life sciences, while offering growth opportunities, also presents execution and integration risks that could affect the company's ability to grow revenue in these new areas if not managed effectively.
  
• Altair's reliance on indirect sales channels and partnerships, such as the collaboration with Hewlett Packard, introduces the risk of misalignment or underperformance by partners, potentially impacting revenue growth.
  
• Foreign exchange rate fluctuations could impact Altair's financial performance, especially as the company operates globally, affecting both revenue and earnings due to currency conversion effects.

Valuation

• The analysts have a consensus price target of $91.54 for Altair Engineering based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $71.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $807.8 million, earnings will come to $63.5 million, and it would be trading on a PE ratio of 167.9x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $90.15, the analyst's price target of $91.54 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.