Shares of data analytics provider Alteryx (NYSE: AYX) traded in a 15% range on Friday after the company announced third-quarter results. After initially falling to below $87, the stock price rallied as high as $101. The volatility reflects the fact that the value proposition for Alteryx is difficult to assess.

Non-GAAP EPS for the quarter were way ahead of analyst estimates at $0.24, up 300% for the year. The market was expecting earnings to grow just 12.5% to $0.09. However, non-GAAP EPS, which include stock-based compensation, were -$0.10, versus the -$0.03 analysts expected. This number was down from flat a year ago.

Alteryx earned revenue of $103.4 million, up 65% for the year and 14% above estimates. The company grew its customer base to 5,613, a 30% increase from a year earlier. Average contract values expanded by 132% from a year ago, reflecting the company’s focus on larger clients.

 

Revenue Growth to Slow

The company expects growth to continue, with revenue for the current quarter to be between $128 million and $131 million. This will represent annual growth of close to 44%, a notable slowdown from past quarters. Non-GAAP operating income is expected to be close to $27 million, compared to $11.9 million in the last quarter.

The stock price peaked close to $148 in September when it was up 250% for the year and 980% since listing in 2017. It has since fallen 40% over the past 7 weeks as the market has grown cautious of high-priced SaaS stocks.

Alteryx does not display the growth and margin trends typical of many other software companies. Usually, revenue growth slows while margins improve. In Alteryx’s case, revenue growth is erratic but only began slowing recently. Margins have improved but remain erratic from one quarter to the next.

 

Expensive, but with Good Reason

The biggest risk in the long term is that competitors with greater distribution capabilities – like Microsoft or Google – pay more attention to the opportunity Alteryx is pursuing. That would of course also make the company a potential acquisition target.

The trailing PE is now 171 and the forward PE stands at 118. This is pricey when one considers historical growth and revenue trends. The price to sales ratio of 18 is also high considering growth rates.

There is some justification for the valuation. Alteryx is operating in a very new industry. There is reason to believe there is a lot of growth ahead for the market and Alteryx is positioning itself as a market leader. It is often mistakenly compared to companies like Tableau, but it is really quite different. Tableau is a data visualization tool, whereas Alteryx is a toolbox to apply data science throughout an organization.

The biggest risk in the long term is that competitors with greater distribution capabilities – like Microsoft or Google – pay more attention to the opportunity Alteryx is pursuing. That would of course also make the company a potential acquisition target.

In the short term the stock price is likely to track the SaaS sector, rather than the company’s own fundamentals. In the longer term, its value will only be proven with time. Investors should look for more consistent growth and margins, rather than the magnitude of these metrics, as evidence of the long-term value of the company.