We keep waiting for the big brains in tech to create an artificial intelligence that will either enrich our lives beyond imagination or enslave humanity until the end of time. During the interim, we have to settle for news like this: Meta (née Facebook) just released a new AI system that lets people turn text prompts into brief, inane video clips. (We tried to test out the Make-a-Video platform, but our laptop virus protection kept setting off alarms about privacy, so Meta still appears to be doing all it can to mine our data in this universe.)
While it would be easy to dismiss this latest bit of AI tech as a parlor trick (like we just did), it’s also pretty friggin’ cool and represents one of the underappreciated benefits of artificial intelligence: Machines can kind of give the average person superpowers. Sort of. Or, at the very least, the ability to create something digitally that goes beyond our regular skillset, creativity, or brain power. It’s not just about creating freaky content like a Soho artist with a few clicks of a mouse button. Software is also turning the average white-collar worker into a data scientist thanks to the proliferation of low-code or no-code platforms that do most of the heavy lifting to build AI-powered applications for a wide variety of use cases. These might range from aggregating and analyzing sales data for business intelligence to designing chatbots to further
alienate service customers.
Companies that offer these sorts of solutions drone on about “democratizing” access to “data-driven insights” and “expanding the capabilities and analytical sophistication available to all analytic producers” in order to “drive data-driven decisions and improve business outcomes.” All of those quotes are pulled from the same boilerplate intro paragraph for the business operations of Alteryx (AYX), a big data company with big buzzy words that is bringing in some big clients and bigger revenue. So maybe it’s not all just talk, after all.
Alteryx Stock: Trick or Trend?
In fact, despite the cloying and annoying language employed by the Irvine, California company, Alteryx is one of the few high-growth AI companies in our Nanalyze Disruptive Technology portfolio that’s not getting absolutely hammered right now in this bearish market. In Q2-2022, the company grew revenue 50% to $180 million, prompting a pop in share price that almost returned it to where it was a year ago before the current economic reality set back in. Of course, it’s all relative and only reflects a single moment in time – like the time about a year ago when Alteryx stock dipped 40% and we opened a position based on its appealing software-as-a–service (SaaS) business model and its 90%+ gross margin.
The trick is to figure out if the latest quarterly performance is an anomaly or a positive trend of more to come, which would bolster our confidence in this AI analytics investment theme.
Automating Data Management and AI Model Creation
First, let’s briefly recap what Alteryx does beyond the buzzy, boilerplate language above, and its value proposition. In our previous article on the company, we described the business as a combination of predictive analytics and robotic process automation (RPA), a technology that uses intelligent bots to do back-office tasks like processing invoices. But that’s probably putting it too narrowly, as Alteryx helps users process, visualize, analyze, and connect many kinds of data from a wide variety of sources. It refers to its platform as analytic process automation (APA) and augments existing workflows and solutions for its customers.
For instance, RPA automates repetitive tasks via bots, while APA can take inputs from bots and automate a “complete data-driven business process and then publish analytic outcomes” directly back to bots. In other words, Alteryx is a service provider to the RPA industry rather than a direct competitor. In fact, one of its major business partners is UiPath (PATH), an RPA stock that has undergone its own value correction over the last year. Another use case covered by APA is database management of unstructured data, an interesting investment theme in its own right, with companies like MongoDB (MDB) currently leading the pack. In addition, Alteryx’s suite of machine learning and AI tools can automate modeling, optical character recognition, and natural language processing, among other capabilities.
Alteryx Goes Cloudy
Earlier this year, Alteryx rolled out a new cloud-based suite of solutions that merges some of its existing capabilities with products from a couple of recent acquisitions. Alteryx Analytics Cloud includes four offerings:
- Alteryx Designer Cloud is just a cloud-based version of the company’s Designer Desktop product, which enables users to “prepare, blend, and output data in a highly visual, code-free way through a browser.”
- Alteryx Machine Learning is an automated modeling solution that brings the same desktop functionality to the cloud as well. The amateur analyst “can now quickly build, validate, iterate, and explore models” with a visually guided user experience while learning about data science using Education Mode. This is part of the company’s whole “upskill” the workforce angle to “democratize” AI.
- Alteryx Auto Insights is a solution that the company acquired when it bought a startup called Hyper Anna for an undisclosed amount of money last year. The solution “works like a human analyst” by finding patterns in data and then visualizing those insights into whiz-bang graphics.
- The Trifacta Data Engineering Cloud comes courtesy of another startup, Trifacta, which Alteryx acquired for $400 million at the beginning of the year. This tool is for extracting and preparing data for analysis from disparate data sources.
Migrating its platform to the cloud seems like one of those better-late-than-never moves, but Alteryx appears to be trying to make up for lost time by spending money on some M&A activity.
Alteryx Stock Offers Sunny Forecast
One assumes that the new cloud infrastructure builds on the company’s strategy to shift from SaaS multi-year contracts to annual contracts. Alteryx actually ended 2021 with a 15% drop in its subscription-based license revenue compared to the previous year because of less upfront revenue. Earlier this year, the company’s CFO put this spin on the drop:
“Our strategic shift to focus our go-to-market on [annual contract value] ACV to strengthen ongoing pricing is working. Average contract duration was approximately 1.5 in 2021, compared to approximately two years in 2020 and 2019. The resulting accounting treatment from the lower contract duration cost us approximately 10 percentage points of revenue growth in 2021. We believe this was a nonrecurring impact for 2021. I’m pleased to report that as a result of our strategic focus on ACV, we are seeing improved pricing, and this sets us up well going into 2022 where we have a large population of renewals.”
The latest Q2-2022 numbers seem to support that statement. Alteryx closed out the second quarter with annual recurring revenue (ARR), also sometimes referred to as annual run rate, of more than $726 million, up 33% year over year, while its dollar-based net expansion rate held steady at about 120%. The former number represents the amount of money that would be received in one year if nothing changes, while the latter denotes how much more money existing clients are spending in one year. Both metrics demonstrate a high-growth company. In addition, Alteryx ended the first half of this year with nearly 8,300 customers, a 12% increase from the second quarter of 2021. On its last earnings call, management claimed it has captured business from nearly half of the 2,000 biggest companies on the planet, up to 46% from 39% a year ago.
Gross margin did fall a bit, from about 90% to 84%, but that still gives the company a long runway when the time comes to start hitting the brakes on losses, which exceeded more than $100 million in Q2-2022. And while the head honchos at Alteryx say international expansion is a key goal to the company’s growth, the needle is moving in the wrong direction. About 71% of business was generated in the United States in the first half of this year, compared to about 66% the year before. Add in the UK and this year’s number jumps to 83% between just those two countries, so the company hasn’t been able to penetrate overseas markets, though it’s not surprising given the current state of the European economy.
But despite the current headwinds, Alteryx recently increased its 2022 ARR range to $820 million to $830 million, representing year-over-year growth of 29% to 30%. This is up from the prior growth range of 27% to 29%. Annual 2022 revenue should fall between $770 million and $780 million, representing a 44% to 45% increase compared to 2021. We’ll see how much blood the company will have to spill to achieve those gaudy numbers.
Alteryx stock is a throwback to the not-so-distant past of growth at all costs. We’re always concerned about getting stuck with one of those nice-to-have platforms that businesses jettison when the economy turns south, but so far that’s not been the case. There must be some real value behind all of the jargon. If Alteryx can hit its 2022 projections at the high end, investors should feel pretty confident that the company has established itself as a leader in big data analytics.
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