Altium: Initiating With a Fair Value Estimate of AUD 47.50 and a Narrow Moat Rating

We initiate coverage on Altium ALU with a fair value estimate of AUD 47.50 per share and a narrow economic moat rating. We view Altium as an exceptionally well-run software vendor that is well-positioned to continue taking market share in the design software market for printed circuit boards, or PCBs, and to drive the electronic component industry’s transition toward online marketing. Our narrow economic moat is based on switching costs and network effects. We forecast revenue to grow at a 10-year CAGR of 17% over the next decade and EBIT margins to expand to 43% from 33%. The primary growth driver is Altium’s Octopart, which we believe is in the early stages of making and taking the market for online marketing of electronic components. We use a weighted average cost of capital of 9%, reflecting a balance between the highly recurring revenue nature of Altium’s design business and the inherently more cyclical online marketplace. We assign Altium a Morningstar Uncertainty Rating of High. We rate Altium’s Capital Allocation as Exemplary. At current prices, Altium’s shares screen as undervalued.

We believe the move toward online marketing for electronics components is in the early stages and we expect Altium’s Octopart to benefit as online marketing becomes a larger share of the market. Altium acquired Octopart, an online marketplace for electronic components, in 2015. Since then, it has grown its revenue by more than tenfold to USD 56 million. However, this still pales when compared with the USD 200 billion market size for electronic components. More specifically, we believe Octopart’s addressable market consists of the USD 20 billion in gross profits made by electronic component distributors. We see online marketplaces as inherently having several advantages compared with traditional distributors, including greater selection, more competitive pricing, and better supplier availability.