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I will dissect current market dynamics and the capital markets with respect to Alteryx, Inc. (NYSE:AYX). You should know that this is one of most complicated equities to be buying, and Wall Street has a lot of this one wrong. Those of you who are considering investing in AYX, I highly recommend you read every word of this document. It is not every day I circulate unpublished research, let alone macro trends and what the capital markets do, and I especially do not reiterate companies I already published theses on. Owning this stock is not for everyone but following the company will earn you a master’s in finance. This write up is an extensive look at AYX in today’s point in time. It is not a thorough analysis of the company’s financials. Shares last closed at $121.51 on 8/7/2020, down 28.18% on the day.
For those who just want the bottom line, and do not want to read this extensive write up: AYX is a long-term winner and will be the Adobe of its class. However, current dynamics of the equity and macro-economic trends – COVID and QE – suggest we are not done with the ongoing AYX selloff. I expect AYX to trade down towards to $105. If the market is to lose its legs, AYX can and will drop to $90, dare I say $70 (not likely). Nevertheless, at prices of $105 or below, AYX becomes a bargain for the long term. Years into the future, my opinion is the stock doubles and triples again. This conclusion is ascertained from the following analyses and review. I maintain AYX is a long term buy.
Bottom Line: Start to buy slowly and add in increased weighting as the stock drops towards $115, $110, $105, $100, $95, or
$90. As the world exits COVID and new earnings are released, buy more, and watch for global corporate CAPEX rebound.
C OVID: This Alteryx recovery can take some time (we will get to this) – as opposed to previous selloffs, where recovery was relatively quick – and there is no timeline I can ascertain, as I cannot forecast COVID dissipation. Moreover, my meetings with COVID executives, doctors, management teams, consultants, and experts who develop, advise, consult, or study COVID vaccines (Tiziana Life Sciences plc – Ame (NASDAQ:TLSA), Atossa Therapeutics, Inc. (NASDAQ:ATOS), Soligenix, Inc. (NASDAQ:SNGX),$ ONCS, Fortress Biotech, Inc. (NASDAQ:FBIO)) and treatments fully anticipate us to carry COVID into and beyond early/mid 2021. Let me begin by saying that, on page 14 of this document, find my AYX equity research from February 2018. I Highly recommend you read it in its entirety before continuing this analysis (page 14 through 23 of this document). I doubt you will find another fundamental qualitative analysis like this for the company. The attached is one of the most extensive research I have done, and it is the only one of mine that you will find with nothing but words. In fact, cash flow modeling is rendered useless as the company delineates 89-92% gross margin and no profit. Read the report, AYX is an extremely misinterpreted company and the report clarifies much of what you need to know about the fundamentals of this business.
My History as an Alteryx Shareholder
I have long been a vehemently strong supporter of AYX. I have bought the stock aggressively since $24 in early 2018 after meeting the CEO and instituting AYX ownership for the California State University Endowment. I have presented the stock as a panelist at $60. Even after 150% and 275% gains, I still urged my guys to initiate positions without hesitation. Most recently, I circulated recommendations in December of 2019, at a price of around $90. For those of you who know me, I study companies of all sizes and industries to find lifelong investments. I have held as much as 60+% of my net worth in AYX multiple times, most recently up until May 2020. Yes I am batshit crazy.
Through June 2020, I reduced my position from over 60% to 3-5% of my net worth. I did not like large cap equities during unpredictable events and recession, mostly because I do not want strong-index-correlated securities in such times. I was also skeptical of COVID effecting salesmanship and adoption (adoption of AYX requires substantial CAPEX). Full disclosure, I remain 100% invested in the equity market, and over 50% in illiquid microcap securities Altigen Communications Inc (OOTC:ATGN), Crexendo, Inc. (OOTC:CXDO), NLH.V (currently).
I have gotten many of you into the stock from $24 through $90. Most recently, it hit a high of $180. This Thursday, earnings were reported, and the stock dropped 30% in one day. Many of you have reached out for my thoughts and recommendation. Some of you are in the stock, some are not.
Let me also preface my discussion by saying my father is retired from the Aramco Organizational Consulting Department, and a Tsinghua University PhD in engineering, turned PhD statistician. My family is from Pakistan. So please forgive my culturally insensitive breakdown of the following extremely complicated nature of software and data analytics with respect to the proliferation of data science, artificial intelligence, data centers, data collection, and business and organizational development and efficiency(all done in the hope of providing clarity to you). I mention engineering because statistics is done by statisticians, who are quasi-mathematicians, like engineers. And Alteryx is not exclusively used by rocket scientists, coding wizards, and autonomous driving car creators. Contemporary colleagues and cousins to the field of my father are the people who use Alteryx. For those who do not want to read the content from 2018, I have oversimplified below.
Summary of Alteryx and My Thesis, Feb. 2018
- AYX is not an artificial intelligence company.
- AYX is not like the rest of the SaaS companies.
- AYX is a quasi-crossover between Adobe Photoshop and Bloomberg Terminal for data science.
- AYX allows for the communication between different departments: OCD, coding, IT, management, etc.
Again, read the attached report starting on page 14, but allow me to oversimplify:
This is data analytics. If you do not understand what that is, think of the Indian or Pakistani math guy. Your statistics professor in college, your NBA team’s back office, or parts of your Democrat and Republican campaign staff. These are skilled laborers whose skill and availability are harnessed and expanded by Alteryx. They now exist in every large corporation in the world. Please see page 17 and 21 of this document to find a short list of notable corporations (Feb. 2018) who consult Alteryx.
- All day, statisticians and data scientists crunch regression analysis (for example). All you need to do to perform regression is collect data.
- i.e. Record how long it takes to get a burrito from the kitchen to customers hands if you have 4 people in the kitchen vs. 6 people in the kitchen.
- i.e. Record how much weight is gained if sample groups of people eat 1k calories a day vs. 2k vs 3k.
- You may find that, yes, weight gain is directly correlated to calories consumed; yet, within your samples you will find differences in how much is gained by each person in each respective group (whether it be height, gender, race/origin, etc.). These differences, if not accounted for in the data recordation process, will lead to inefficiencies (error) in your modeling.
- Regression tells you correlation of one thing to another. You can model an event, inputs, and outputs: y=mx+b.
- In statistics, y=mx+b is too concise and perfect, it must also add variable e rror: y=mx+b+E. This can represent processes or events.
- A process is continually improved upon until error is minimized. This is done, in part, but collecting even more data.
- In our example of weight gain, the additional variables of height, weight, and race can be accounted for in a new, more concise formula with smaller ‘E’ or error.
- Correlation of large amounts of data, and the analysis of its outputs tells you what decision to make. Who to fire, where to place the milk in the grocery store for maximum sales, how to organize the kitchen inside a McDonalds to get the burger from scratch to the customer’s hands in the fastest way possible? With this analysis, you identify bottlenecks, you identify where to place an advertisement, you identify how and where a certain demographic of people on Facebook will navigate, optimal staffing, best pricing for profitability, etc.
- Some of these are all simple processes/questions and can be solved using one Pakistani mathematician, a notebook, and paper.
- A more complex version of this is lean six sigma, where you are now utilizing data and analytics and your Pakistani math guy to optimize supply chain, for example, with extremely minimized error. Supply chain might not be a dire necessity, but minimal error is crucial for something like hospital beds and hospital staffing during COVID.
Decision Making: you simply attribute variables to events, model the events and results, minimize error, and the math tells you what to do (or advises you what to do).
Finally, and it is worth noting, given contemporary technology:
- If you collect enough data – I am talking gigantic sums of data such as every single click made on Amazon or every single turn and movement of a vehicle (geospatial data) – you can then hire a legion of Pakistanis (it’s true trust me) to crunch your numbers and ascertain, with the help of your legion of coders and GPU manufacturers – how to create a self-driving car. It is a continuous series of collected data and new data, fed into a steroid version of y=mx+b+E, that allows for a car to drive by itself . . . and, eventually, continue to become a better driver of itself by collecting new data simultaneously and ‘minimizing error.’ This is what artificial intelligence is. Continuous ‘learning’ and minimization of error. The car is essentially thinking: when *this* happens, I respond by doing *this.*
- The car attributes left turn to ‘A’ and right turn to ‘B’ . . . and so on. Eventually you get a ‘ABCDEFGHIJKL’ happening in real life, and the car responds with the output ‘XYZ.’ This could happen in less than a nanosecond.
- Every click on the internet or 0.0001 degree turn of the car holds meaning in a statistical sense. Data is now produced at a pace never seen before; it will grow to paces never seen before. Companies are collecting data like never before (datacenters, inventory levels, cars, shipping logistics, transportation logistics, staffing, etc.).
- There is nothing in the world statistics does not apply to. It only took us thousands of years to find this out. Up until the late 90s, data analytics was a quasi-IT department, not understood by many. Another AYX catalyst is the proliferation of the role of a Chief Data Officer and departments dedicated to organizational development.
- My Father’s time with Aramco was in the Organizational Consulting Department. Saudi Aramco is so large that, when I lived there, I lived in a campus/city shut out from the rest of Saudi Arabia. Aramco has its own schools, libraries, hospitals, etc. My father found himself in a hospital one day, an oil field the next, a different office another, etc. He was no geologist; his department was brought in to improve processes.
So, the point is, with this much data, the legions of my Pakistani countrymen were reduced to ‘wasting time’ waiting for such mass amounts of data to be crunched by outdated software. There was so much data that it could not be harnessed, prepped, blended, and prepared for decision making (who to fire, what product to cut, etc.)
Let me drag out one other example of mass data, also covered in my 2018 report. Home Depot has 2000 stores, it has 200,000 SKUs, and each store will hold 100,000 SKUs. You can imagine all the combinations and permutations this yields.
Alteryx is the key to harnessing this data. It takes Home Depot 2 weeks to crunch and simply prepare data from those permutations when traditional software is used. It takes Alteryx software under one hour. It tells Home Depot exactly
which product to place on which shelf during July of a calendar year (a solution to a question with millions of possible outputs). It tells them what product to make seasonally available. It tells pro sports teams who to put on the floor in the last 2 minutes of the game. Consultants who use Alteryx for clients’ supply chain (and more) look genius. These people can walk in a client’s grocery store and tell them what to do after collecting data.
That is as far as I will go, let me reiterate that the extensive breakdown of this company is included in the attachment, page 14.
Now, For the Good Stuff
My history delineates I buy companies I want to hold forever. Here is the current reflection of my research (below, as of 7/31/2020). AYX dropped 30% on 8/7/2020; and still, I have not changed my mind. In the past, it dropped 10% and 30% multiple times, and even 50%, before fresh new highs.
I own each of these companies and I hope never to fully relinquish ownership.
For you and AYX, currently, it is a matter of identifying an entry. I maintain it is just too early and the bottom of this current selloff has not come; nevertheless, I already began buying (very small exposures) and will continue to do so as we move downwards. Again, in the past I have held as much as 63% of my net worth in the stock (I will literally have this audited). If you buy even today, I believe that you will later be handsomely rewarded. Still, my conclusion is that we are likely to drop further and that we may be able to find better points of entry.
Alteryx Since 2018: An Absolute Gem, Set Up to be Marred; Now Corrupted by The Street
AYX was a clean slate with no debt when I first invested. I bought at every single dip. Fundamentals and earnings, as time passed, got better and better. Then, two major things events that most did not pay attention to happened. You need an understanding of the business to understand some of the following, but let me quickly explain…
Leverage: On 5/14/2018, the already volatile Alteryx engaged Goldman Sachs and JPMorgan to help issue a convertible debenture ($200 million) on the company. There is a Bill Gross thesis on this and, in short, this catalyzes a hedge fund trading strategy: arbitrage – shorting warrants, buying stock, shorting stock, buying the bond (luckily no warrants on AYX). This increased volatility in the stock substantially and caused lag in price appreciation after positive earnings results. Without getting too detailed – this has binomial and stochastic nuances, literally rocket science – think of it simply as leverage.
If you take leverage, your up and down swings are more violent. More gains, and more losses. Simple as that. Whether it be your portfolio return using margin, or a company’s stock after an increase in debt. HOWEVER, if you add debt and all else remains equal, it is likely the value of the business increases immediately (we will get to this later in my analysis of ZIRP, but allow me to preface with the following):
If Apple adds 1% interest bearing debt tomorrow, it catalyzes the stock price up for no good reason other than that they added (cheap) debt (cost of capital considerations). If Apple started to deteriorate, the stock would obviously go down, but the move down is now more violent. This idea is relatively simple: you lose money, you lose borrowed money, you still pay back borrowed money in full plus interest, but you also absorb the loss.
With AYX through 05/2018:
- You have added convertible debt to an already high beta security.
- You have introduced more hedge funds (‘market movers’) to the stock, some who may not know or care to know a single fundamental thing about the company.
- The high beta security also happens to grow 50% a year with zero profit and 90% gross margin.
- You have introduced significant leverage on a 50% growth, software company with zero profit. Now, the company’s previous moves of up 10% or down 10% have become 20-30-40% swings. We saw just that, only a few months after the debenture was written in 05/2018. The stock rose 90% right after the debenture was issued until 09/2018 (as AYX revenue again grew 50%) and then dropped 30% in 10/2018. It then proceeded to run up 222% the next 10 months. Case in point: Leverage.
To give you my train of thought up until this point – I was horrified to see my baby, which I invested in at 0 debt levels, being polluted. Nevertheless, business was stellar, debt was supportable, and the stock appreciated grandiosely. The debenture was a huge positive for shareholders. It only meant that every dip was a buying opportunity. The fundamentals remained stellar.
- I was not concerned about the convertible; at end of July 2018, I had 53% of my brokerage account invested into AYX (I will literally have this audited in fund formation procedures).
- Important note: after all this, at this point, we observe a beta on the stock, adjusted or otherwise, nearing 2.0. That is extremely volatile to begin with . . . before what happened next . . .
- Please see appendix on page 13 of this document for the debenture instrument I covered above.
Institutional Coverage: The company became very successful very fast. Then came what I call the ‘kiss of death.’ My history delineates I try finding companies early, before big buyers come in. Well, here, they came in all at once. In mid-2019, at all-time highs at a range between $80 – $90, two disasters happen (which do not seem like disasters – if you do not understand the business of capital markets – because initially, this sent us to all-time highs):
- CNBC starts blasting AYX all over the place. Note, I do not watch a minute of that garbage, but my colleague told me about this, and I tuned in. Jim Cramer begins heralding AYX and thinks he found gold. He, of course, presents the company in a media frenzy, tech sense. AYX is still smashing estimates and growing 50%+. It is likely the Cramer endorsement got buying viewership, most certainly of retail investors, but that means very little now that we sit at a $9 Billion-ish market cap, have a beta of 2.0, have 50%+ growth, have convertible debentures, and have no profit. Regardless, at this level of success as a tech company, the institutions began to watch/pile in.
- At this point, the stock has been arbitrarily reduced to and grouped with other high flying, leveraged SaaS companies (I call them leveraged particles of shit) such as $DDOG, $OCTA, etc. (the same ones it is being grouped with today).
- Goldman Sachs issues a buy rating on the stock of $111 or $105 in June 2019 (something around that) when the stock was around $95. I believe this was the first substantial endorsement for the company. It also came around the same time as the Cramer endorsement (mid-2019). Remember, Goldman issued the 2018 convertible debenture (. . . cue the institutions. . . cue volatility . . .) on the sell side.