On Monday, JPMorgan (NYSE:JPM) issued a rating downgrade for Altair Engineering (NASDAQ:ALTR), shifting its stance from Overweight to Neutral, accompanied by a price target adjustment to $95.00. The firm's rationale is based on Altair's significant stock price increase of 35% since last December, outpacing gains seen in its software group peers and the broader market.
This surge has led to what JPMorgan perceives as an overextended valuation for the company, which is trading around $100, a figure that suggests a takeout multiple or a free cash flow (FCF) yield of approximately 1.8%.
The analyst noted that while Altair possesses superior technology with scarcity value, particularly in the realm of physics simulation for chip design, the broader software spending environment appears weak. There is a growing debate over the impact of General AI on traditional application spending.
A notable indicator of sector challenges is Dassault's recent guidance cut, which was significantly influenced by a delayed large-scale on-premise subscription deal amid heightened scrutiny of big transactions.
Adding to the concerns, a survey of 166 Chief Information Officers (CIOs) conducted by JPMorgan revealed that 33% are diverting funds from other projects, with legacy systems and infrastructure being the most affected areas.
This trend underscores the potential volatility in decision-making processes within the IT sector. Altair's recurring revenue rate, which stands below average at 80%, is another factor that could pose a risk in the current climate.
Despite Altair's strong FCF conversion, which remains at 90% of EBITDA, the company's margin expansion has been inconsistent. Growth is anticipated to be modest this year, with only a 50 basis points increase compared to the medium-term target of 200-300 basis points.
The need for continued investment in the competitive electronics sector is likely to slow the progression of margin expansion, which has been a critical element of JPMorgan's previous positive outlook on Altair's stock.
In other recent news, Altair Engineering Inc. has announced a definitive agreement to acquire Metrics Design Automation Inc., expanding its presence in the electronic design automation industry.
The acquisition will integrate Metrics' cloud-based digital simulator, DSim, with Altair's Silicon Debug Tools. Altair also reported strong first quarter results in 2024, with total revenue reaching $172.9 million, a 6.9% increase from the previous year, and software revenue accounting for $158.4 million.
In a strategic partnership, Altair has joined forces with HP Inc (NYSE:HPQ). to enhance its Material Data Center, aiming to streamline the design and production processes for 3D-printed parts. This collaboration is expected to expand the adoption of 3D printing technology across various industries.
Altair has also 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
In light of JPMorgan's recent downgrade of Altair Engineering, it's valuable to consider some of the financial metrics and InvestingPro Tips that could provide additional context for investors. Altair's market capitalization stands at approximately $8.32 billion, reflecting the significant growth in its stock price. Despite a high P/E ratio of 789.91, which may support JPMorgan's view on valuation concerns, the company's revenue growth remains positive at 7.11% over the last twelve months as of Q1 2024. This indicates a steady business expansion, albeit at a slower pace than the prior quarter's 4.14% growth rate.
Investors should note the strong gross profit margin of 80.64%, suggesting Altair's ability to maintain profitability despite the competitive pressures in the software sector. Additionally, the company's price is currently at 98.88% of its 52-week high, which aligns with JPMorgan's observation of the stock's robust performance. One of the InvestingPro Tips highlights the importance of considering both the PEG ratio, which for Altair is at 7.46, and the price/book ratio of 10.91, as they can provide insights into future growth expectations and the company's valuation relative to its assets.
For those interested in deeper analysis, InvestingPro offers more comprehensive insights and tips. Currently, there are additional tips available for Altair investors, which can be accessed with the use of coupon code PRONEWS24 for up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. These tools can help investors navigate the complexities of the market and make informed decisions in the context of Altair's recent downgrade.
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