On Friday, Goldman Sachs revised its rating on shares of Altair Engineering (NASDAQ:ALTR), downgrading the stock from Neutral to Sell and adjusting the price target to $71 from the previous $85.
The decrease in the price target suggests a 17% downside potential, as opposed to the approximately 24% upside observed for the broader coverage of the firm.
Altair's second fiscal quarter of 2024 was characterized by performance in line with expectations, with Software Product Revenue growing by 10.6% in constant currency terms, surpassing the guidance of around 8%.
Total Revenue exceeded market consensus by approximately 1%. However, the company experienced slight misses in Non-GAAP Operating Margins and Free Cash Flow Margins, with both falling short by roughly 100 basis points.
Despite acknowledging Altair's solid fundamentals, its strong position within the Simulation market, and its success in go-to-market verticalization, Goldman Sachs anticipates limited stock price appreciation from current levels.
The firm noted Altair's Last Twelve Months (LTM) performance, which showed an 18% increase, outpacing the average growth of the broader coverage at 2% and selected Engineering Software peers at 10%.
The downgrade is further justified by Altair's more modest 'Rule Of' profile, which is a financial metric that combines growth and profitability. Altair's Next Twelve Months (NTM) profile stands at 31%, which is below the average of the broader coverage at 35% and the Engineering Software peer average of 38%. Despite this, Altair's stock has been trading at significant premiums in terms of Enterprise Value (EV) to Sales and EV to Free Cash Flow.
Goldman Sachs maintains a constructive view on Altair as a company but believes that the stock's current valuation does not leave much room for near-term revenue and profitability estimates.
The firm suggests that a reassessment of the stock's potential will be considered upon clear and persistent indicators of Altair's ability to significantly accelerate growth and improve its 'Rule Of' profile among other factors.
In other recent news, Altair has seen several significant developments. The company reported robust first-quarter earnings in 2024, with total revenue reaching $172.9 million, marking a 6.9% increase from the previous year. Software revenue accounted for $158.4 million of the total.
Altair has also entered into an agreement to acquire Metrics Design Automation Inc., expanding its presence in the electronic design automation industry. This acquisition will integrate Metrics' cloud-based digital simulator, DSim, with Altair's Silicon Debug Tools.
Moreover, Altair has partnered with the University of Nottingham to develop a pioneering aerospace digital twin project. The partnership grants University of Nottingham researchers access to Altair's HyperWorks and RapidMiner platforms, aiding in the creation of a digital twin to enhance the design, validation, and testing of electric propulsion systems.
JPMorgan has downgraded Altair's stock from Overweight to Neutral, citing an overextended valuation following a 35% stock price increase since last December. Conversely, Altair has also partnered with HP Inc (NYSE:HPQ). to enhance its Material Data Center, aiming to streamline the design and production processes for 3D-printed parts.
Lastly, Altair has been included in the S&P MidCap 400 Index, reflecting its consistent growth and established position in various fields. Despite some underperformance in Q2 due to external factors, Altair remains optimistic about strong software revenue growth and adjusted EBITDA for the rest of 2024.
InvestingPro Insights
As Goldman Sachs adjusts its outlook on Altair Engineering (NASDAQ:ALTR), real-time metrics from InvestingPro show a complex financial picture. Altair's market capitalization stands at $7.08 billion, reflecting its substantial presence in the sector. However, the company's P/E ratio, at a high 271.64 and adjusted P/E for the last twelve months as of Q1 2024 at an even higher 672.27, indicates a significant premium in its stock price relative to earnings. This aligns with Goldman Sachs' concerns about the stock's valuation, suggesting that the market may have already priced in future growth expectations to a considerable extent.
InvestingPro Tips highlight the company's robust gross profit margin, which at 80.64% showcases Altair's ability to maintain profitability on its products. Additionally, the EBITDA growth of 259.85% for the last twelve months as of Q1 2024 is a testament to the company's operational efficiency improvements. These factors may provide some counterbalance to the concerns about valuation and growth potential raised by Goldman Sachs.
For investors seeking further analysis, InvestingPro offers several additional tips on Altair Engineering, including insights into revenue growth trends and operational performance metrics, which may provide a more nuanced understanding of the company's long-term prospects.
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