I think Altium Limited (ASX: ALU) is one of the best growth shares on the ASX and worth a place in most portfolios.
It’s an electronic PCB software business that helps engineers design the products, machinery and services of the future.
Here are three reasons why I think Altium is looking good:
Recurring revenue for software as a service (SaaS) businesses is extremely attractive because it essentially means a locked-in amount of revenue and profit at a high profit margin. Having that money roll in year after year is very attractive.
Altium said that at the half-year result it had improved its earnings before interest, tax, depreciation and amortisation (EBITDA) margin to 36.3%. It also said that 57.5% of its revenue is recurring, which is a pleasing amount.
Multiple growth avenues
Some businesses on the ASX, even the best ones, only have one product to sell to the market. However, Altium has plenty of products and geographies that it can pursue.
It has Octopart, TASKING, Nexus, Altium Designer and Altium 365 that are all growing at an impressive pace. If one segment isn’t doing well then hopefully the rest can perform well for Altium and shareholders. China is a very big opportunity for Altium if it can continue to grow well there.
Excellent balance sheet
Many of the world’s most exciting growth businesses don’t have much of a balance sheet, and they are certainly burning through cash. .
However, Altium continues to grow the amount of cash that it holds. At December 2018 it had reached US $58 million and will probably keep growing as long as profit keeps growing until another acquisition opportunity comes along.
Free cash flow continues to rise at the business, with some of it heading out of the door to shareholders in the form of a growing dividend.
Altium is trading at 48x FY20’s estimated earnings. This is expensive compared to the market, but if it delivers on its long-term growth targets again and interest rates remain low, then this current price could seem good value in time.
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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019