Alteryx (AYX) stock price is still not cheap enough – rule of 40 says

The Alteryx (NYSE: AYX) stock price was one of the top pre-market movers on Tuesday after the companies published encouraging results. The shares jumped by more than 17% in the pre-market, reaching a high of $36. Despite the rebound, the stock has dropped by over 50% from its highest point this year and by 80% from its all-time high.

Alteryx is a SaaS company that provides analytics automation software to companies worldwide. It serves over 8,300 companies, including well-known brands like JP Morgan, Netflix, United Parcel Service, and Pfizer.

Like other SAAS companies, Alteryx’s business saw revenue growth in the era of low-interest rates. That era saw strong growth by other SAAS companies like CrowdStrike, Okta, Atlassian, and Adobe.

Recently, however, many SAAS companies are going through weak growth as large companies slash their cost of operations. As a result, some of these companies are now transitioning from growth to value.

Alteryx is one of these companies. In its earnings statement, the company said its revenue rose by 7.4% in the third quarter to $232 million. This revenue was $20 million higher than its guidance. 

It expects that its revenue will grow by between 11% and 13% to between $334 million and $340 million. Alteryx tends to be highly conservative in its guidance, as the company’s CEO said:

“We feel it’s prudent and responsible to be conservative, if you will, around Q4 guidance, but we also know that Q4 is by far for us the biggest cohort of renewals in the fiscal year.”

Alteryx’s operating income was $36 million, higher by $30 million above its guidance. Therefore, Alteryx stock price jumped as investors cheered these strong results and the firm’s focus on reducing costs.

So, is Alteryx a good company to invest? While the shares have crashed hard in the past few months, it is still highly overvalued. For SAAS companies, investors focus on the Rule of 40 approach. 

This rule looks at a company’s margins and growth. In this case, Alteryx had an operating margin of -16% and revenue growth of 7%. Therefore, if you do the totals, to -9, which is significantly below 40. This is a big red flag based on this rule. 

On a positive sign, the company is said to be considering a sale. It is already working with investment advisors and taking bids from either other technology companies or even private equity companies. 

Therefore, at this stage, I believe that it makes sense to have a small allocation in Alteryx hoping that it will be acquired. Fundamentally, if it decides to continue as an independent company, it will face profitability and valuation challenges. 

If it does this, Alteryx should be valued as a value stock rather than a growth one. This means that its stock needs to drop quite a bit. 

Turning to the daily chart, we see that the AYX stock price remains below the 50-day and 100-day moving averages. But most importantly, it has formed a falling wedge pattern, which is a bullish sign. Therefore, this rebound could see it retest the key resistance point at $46.40, the highest point on July 10th.

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