AYX Sell Thesis-Microsoft Entering Aggressively

Investment Analysis Clubs Saul’s Investing Discussions
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As a former AYX long, I have been a seller of AYX shares and now own a small position in the puts for several reasons (heavy insider selling, Co-Founder/CTO departure, DLA/ELA deals, extreme valuation). However, my primary bearish rationale is that competition in the data preparation and analytics market is intensifying rapidly, which I expect to cause cause significant price deflation, and I do not believe the market understands this dynamic, particularly as it relates to Microsoft’s new, modern, Advanced Dataprep with Dataflows release (discussed below). In sum, it is my opinion that current AYX software pricing, corresponding revenue growth rates and valuation will prove unsustainable.

Current sticker pricing for Alteryx Designer is $5,195/user/year for a 1-year subscription, plus important add-ons such as scheduling ($6,500/user/year), spatial data ($11,700/user/year) and demographic/firmographic data ($33,800/user/year). For analytics at scale, Alteryx Server lists a base price of $58,500/year (“base price for single server with 4-cores”), with data discovery and sharing add-on Connect at $39,000/year and add-on Promote at an unlisted price.
https://www.alteryx.com/products/platform-details/pricing

While the vast majority of AYX’s business is on-premise (rather than cloud-based), customers who choose to bring their own license to a cloud platform (such as AWS or Azure) pay additional infrastructure costs. While AYX negotiates package discounts for larger customers (sometimes through bespoke departmental and enterprise license agreements that can include a mix of products and seats), AYX’s pricing is a recurring topic of discussion among users (three Gartner examples linked below), with the latter noting “Pushes the limit on Price to Value though. Too much competition is going to force an adjustment.”
https://www.gartner.com/reviews/review/view/548482
https://www.gartner.com/reviews/review/view/510383
https://www.gartner.com/reviews/review/view/475276

Competitors abound and the landscape is evolving RAPIDLY:

Other data science competitors include the following:
Workiva’s Wdata - https://www.workiva.com/wdata
Salesforce’s Einstein Analytics - https://www.salesforce.com/products/einstein-analytics/overv…
Google Cloud Platform - https://cloud.google.com/blog/products/gcp/google-cloud-plat…
Amazon QuickSight - https://docs.aws.amazon.com/quicksight/latest/user/welcome.h…
SAS - https://www.sas.com/en_us/solutions/analytics.html

Note: The author of this post presently has a position in securities of this issuer and may trade in and out of any such positions at any time without notice. The author makes no representation or warranty as to the accuracy of the data or opinions contained herein. Please do your own research.

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Welcome to TMF!
Amazingly convenient and fortunate that you found a board that is full of AYX longs as the location of your very first, and only, post here at the Fool!

What a coincidence!

Dreamer

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Yes, thanks, I posted it because I wanted to be helpful to a board full of what appear to be some pretty nice folks trying to understand their companies and compound their savings. I had read this board on and off for a while, and had seen some very good technical and industry commentary on other companies, and decided to contribute my research and opinions here.

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Yes, thanks, I posted it because I wanted to be helpful to a board full of what appear to be some pretty nice folks trying to understand their companies and compound their savings. I had read this board on and off for a while, and had seen some very good technical and industry commentary on other companies, and decided to contribute my research and opinions here.

MountainDog18,

I appreciate your intent. And I don’t want this place to be an echo chamber. But as Dreamer pointed out, this is your first post, and we all have had to establish our credibility over time. You seem like a nice guy – just know that this is how it works here. With a new poster for whom no reputation has been established, we have no more reason to listen to a post here than to a short piece on Seeking Alpha.

But giving you the benefit of the doubt, here’s my response: All you’re really saying is that there is competition. This isn’t news. And yet, just a month or so ago, AYX turned in a quarter where their growth accelerated (to 54%), and gross margin grew even faster (66%), and they now have 40% more customers than they had a year ago. If competition is killing them, someone forgot to tell their operating results.

All that said, welcome to the community and I hope you keep posting.

Bear

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“All you’re really saying is that there is competition. This isn’t news.” That’s actually not what I’m saying - I’m pointing out there is new competition from an industry gorilla and lead AYX partner (Microsoft) at an extraordinarily low price point that I have not seen discussed anywhere else. And, that the company in the top right of the Magic Quadrant (KNIME) offers a FREE desktop version and $8,500 server option.

No question they just posted a great quarter. I try to be forward looking in my investing, rather than backward looking. I ask myself: “what does the market price in today, vs. what is actually happening with the company/industry?” Feel free to completely discard my post if you disagree. I linked to all the relevant data so we can discuss the specifics. If I’m wrong, I want to know where.

p.s. How do you guys do bold/italics on here?

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I also realized that this is your first and only post on MF. It certainly raises suspicions that you are a short who joined the Fool simply to spread fear and advance your short position.
Just sayin…
Saul

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My put position is tiny/insignificant in size. Much easier to make money on long side than short side. Again, I posted this research to be helpful to what looked like a very nice group of people (some of whom have posted some terrific company/industry commentary), not to irritate.

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I also realized that this is your first and only post on MF. It certainly raises suspicions that you are a short who joined the Fool simply to spread fear and advance your short position.
Just sayin…
Saul

Some invesigative reporting:

Date: 10/3/2018 9:07 AM
I had read this board on and off for a while, and had seen some very good technical and industry commentary on other companies, and decided to contribute my research and opinions here.

https://discussion.fool.com/yes-thanks-i-posted-it-because-i-wan…

Report MountainDog18’s Profile
General Information
Fool Since:
October 2 2018

http://my.fool.com/profile/MountainDog18/info.aspx

Denny Schlesinger

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Denny, anybody can read the boards here, logged in or not. I had read for a while, and decided to post my research here (yes, my first Fool post) because I thought it would be helpful to you guys, who seemed to discuss AYX a lot and know quite a bit about the company and SaaS industry.

Would anyone like to discuss the merits/demerits of the bull/bear views? I am well-versed in the bull case here too.

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As a former AYX long, I have been a seller of AYX shares and now own a small position in the puts for several reasons (heavy insider selling, Co-Founder/CTO departure, DLA/ELA deals, extreme valuation). However, my primary bearish rationale is that competition in the data preparation and analytics market is intensifying rapidly, which I expect to cause cause significant price deflation, and I do not believe the market understands this dynamic, particularly as it relates to Microsoft’s new, modern, Advanced Dataprep with Dataflows release (discussed below).

MountainDog18

As for your position on Alteryx, I believe it to be a “UNKNOWN” risk. I say that because things really could go either way, in my opinion. I have seen cases where competition crushes up and coming companies but I have also seen cases where smaller companies have fended off and thrived despite competition from the bigger players. I think there really would be so many variables in how competition might play out that no one can truly predict it accurately. The only thing a investor can do would be to acknowledge competition concerns as a risk to monitor for signs that true competition might be impacting the results of a company.

I have seen people make predictions such as your before concerning how competition might affect a company and when it really gets down to it, in general, the way I feel about predictions would be that most people have a accuracy on their predictions from anywhere 30% to 70% depending on the person, with few people being so obtuse to be at 30% and few people having the capability of being as accurate as 70%…so most predictions I just assume to have a 50/50 chance of happening, so I tend to treat any predictions as a “UNKNOWN” RISK whenever I invest in something and I make sure that I am comfortable taking the loss should it occur if the risk should play out.

Starrob

I appreciate your intent. And I don’t want this place to be an echo chamber. But as Dreamer pointed out, this is your first post, and we all have had to establish our credibility over time. You seem like a nice guy – just know that this is how it works here. With a new poster for whom no reputation has been established, we have no more reason to listen to a post here than to a short piece on Seeking Alpha.

PaulWBryant

MountainDog18, Keep posting your observations. I own Alteryx but I also believe the argument that a person must have a “reputation” to be a poor way to research different points of view. Using “reputation” can be used as a time management tool to avoid reading people that one feels have a high degree of inaccuracy but if people use that tool to screen people, they suffer the risk that the person that they would be screening might actually be “right”.

I think people that use “reputation” alone to discredit a point of view do themselves and others a disservice by not debating a opposing view directly.

My attitude would be that every person has a point of view that everyone states as a OPINION. Some OPINIONS, that come from people with high reputation wind up being wrong sometimes and sometimes OPINIONS coming from people with low reputations ultimately wind up being right.

I personally disregard things like reputation and expertise while depending more on how someone states their case and how a person can connect their case to factual information as I think over different points of view.

I also think too many people get caught up in the fact of whether someone would be long or short. I have seen people accuse short sellers of being biased because they will make money off their position. Hello, Long investors also seem to be biased because they too would make money off of their position. Lots of investors remain blind to the fact that long investors also have incentive to be biased.

My very first experience on the Fool was when a bunch of so-called “experienced” investors told me point blank that Short sellers were “wrong” about Chinese small caps being frauds back in 2008/2009 and it all blew up in their faces because those companies were frauds.

That was my first lesson in that ANY investor can be wrong, no matter if they are short, longs, neutral, or have a sterling reputation and I completely disregard people that make the case on whether someone is wrong or not based upon whether they would be short or not or based upon any imaginary thing like “reputation” which would be shorthand for if I like someone and they agree with a position that I have already decided on they automatically have a “Great” reputation, while on the other hand people where I dislike their personality and I disagree with what they are saying…well those people have a “Poor” reputation. That’s how I observed most people use reputation and I maintain that whether or not someone is both hated and disagreeable has nothing to do with whether they would ultimately would be “right” or not.

Starrob

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We are living in the Age of Fake News. Innocent util proven guilty but with very low credibility at this point in time. Trust must be earned.

Would anyone like to discuss the merits/demerits of the bull/bear views?

No position or interest in AYX.

Denny Schlesinger

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Certainly a well written piece with supporting references. I have been long AYX for about one year.
I will take this under consideration as the next round of earnings come forward.

It will be interesting to see how this develops.

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We are living in the Age of Fake News. Innocent util proven guilty but with very low credibility at this point in time. Trust must be earned.

captainccs

Deciding things by trust alone would in my opinion only be for those unwilling to think out the pros and cons of various positions for themselves and only want a “trusted” person to do it for them.

I got burned before by listening to “Trusted” people and I learned to research things for myself and not to solely rely on trust.

Starrob

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Would anyone like to discuss the merits/demerits of the bull/bear views? I am well-versed in the bull case here too.

Microsoft is an effective enterprise company, but they are for-profit and all their customers know it in their pocketbooks with true-ups and licensing fees.

Azure is doing good. It won’t kill AWS or GCP.
Microsoft Storage Spaces is an HCI solution. It hasn’t stopped Nutanix or VxRail or Hyperflex, etc
Microsoft Hyper-V is a virtualization hypervisor. It hasn’t stopped VMware VSphere from dominating the virtualization space, nor has it slowed the growth of Acropolis (Nutanix).
Microsoft Office is the gold standard. Google’s office alternatives have flourished.
Microsoft came out with the Surface laptops. Dell, Lenovo, HP, Acer, and others still in business.
Microsoft has Azurestack. Hasn’t stopped Cisco Cloud Center growth, or RedHat Openstack, or HPE OneSphere, or Nutanix Calm, or VMware Cloud Foundations.
Microsoft has had SQL Server for a long time. Oracle still in business.

Alteryx in the Leader quadrant for 2018 for Data Science and Machine Learning. Microsoft is not.

I fear these fears are overblown.

hth,
Dreamer

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Dog,
Here’s my take on your post.

Some folks regard your post as suspicious as this board emphasizes long positions without the use of leverage. You’ve come here with your very first post recommending a short for a company that you are apparently aware of that many of us hold long positions. In fact, that seems specifically why you decided to post here.

Personally, I don’t take your post as a means to boost your short position. Despite the fact that this board now has a lot of followers (I couldn’t guess how many, but the number has obviously grown significantly in the 5 or so years since Saul started it), I don’t think the market would be moved much if at all if every one of us who are long AYX all headed for the exit tomorrow. I could be wrong, but I just don’t think there’s enough stock collectively owned in any one company here to make a dent.

90% of all trades are programmed, that is to say they are made by various funds and ETFs that move based on criteria other than fundamentals. I’m not sure exactly where AYX fits in that spectrum, but I would really doubt that the buying/selling power of this board moves markets.

So I’m willing to take your input as an honest appraisal of your opinion of the prospects for AYX. You started your post by saying you were formerly long, so I’ll take that at face value. You’ve linked to a bunch of backup citations that I have not taken the time to read, but it suggests you’ve done considerable homework and the result of that homework informs you it’s time to make an exit, even more than make an exit. You’re shorting the stock with a “small” put position.

I’ll take it at face value. Thanks for your input. Nevertheless, I’m going to let AYX tell their own story. If you’re right, we’ll soon see signs of it in their quarterly reports. If you’re not right, well same thing, their ERs will tell that story as well.

To be honest, I’ve always been a little suspicious of AYX with respect to a moat. I’ve never been convinced that they have much of one. So I’m going to keep a close eye on this. I think there’s a good chance that you’re right, but maybe just a bit premature with respect to pulling the trigger. Companies that are pretty much in a leadership position don’t often erode to falling far behind overnight.

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Great post!
I’m a little disappointed that our collective first response to Mountain is one of suspicion. He presented a well researched and thought out post on some of the risks of AYX. He didn’t exhibit any of the usual “short” pet peeves of mine such as posting on every single board that could have an AYX investor or engaging in obvious hyperbole and twisting of the facts. Personally I find the information to be useful and interesting. Although,I happen to disagree with Mountain’s conclusion that AYX is a bad investment. If over time any of the above changes, well. I’m happy to change my mind.

Now RE: Mountains post.

Somewhere a while back I said that one doesn’t have gross margin’s of 90% and not have any competition forever. Data analytics is here to stay, AYX is the current leader by far. In their last CC they basically said they don’t have competition right now. THat has got to change and will change at some point. AYX is also saying they think their TAM is larger than the 70 billion initially estimated. AYX is not. Lets be clear. AYX is turning into a platform that other people are building businesses and products off of.
I don’t have enough background to evaluate the competition but I know people that do. I’ll be back once i talk with them. I think one can look “too” forward and miss out on lots of investment.

RE: Insider selling. Heavy insider selling doesn’t bother me on a company that recently had their IPO and has a bunch of people that were paper wealthy but actual usable cash poor.

RE: DLA/ELA deals (don’t know what that stands for)

RE: CTO departure. THe guy wants to bike and be vegetarian. Seriously. Mark Andreson from PANW just joined the board. I think they are in good hands.

Re: extreme valuation. Yes, they are highly valued because of all the reasons we have been discussing on the board. There will always be risk, and I’m sure they will gave a pull back at soem point. At this point though, I want to be part of the story.

THe numbers will show us when competition is heating up to the point where it affects AYX. At this point, they are growing like stink, are exuberant about their possibilities, and have no viable competition (yet)

P.s. Power BI uses ayx’s data engine unless something changed with this latest release.

Best,
e

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Starrob - Good comments, thanks. I agree it is unknown how it ends up playing out, both for the industry and the stock prices. In investing, everything is unknown until it is in the rear-view mirror.

DreamerDad - Also good comments, thanks. I suppose I would counter by saying that in all of these various markets you cite where MSFT competes, the price points tend to be similar among the competition (and, in the case of Microsoft Office, I believe MSFT is at a substantial premium to Google). My thesis is that the Advanced Data Analytics market pricing seems likely to converge to MSFT’s (or KNIME’s) level, as well, particularly as MSFT can afford to price for market share gain.

Brittlerock and Hydemarsh - Thanks for the nice comments.

At the end of the day, it is amazing to me how quickly these industries are evolving. The ultimate winner usually seems to be the end user/consumer, as prices fall and technology improves.

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To answer your earlier question, to make italics preface your comment with and finish your comment with </ i> (without the spaces).

For bolding use and </ b>

If you are going to post a chart, to preserve the spacing us 

 and </ pre>


Welcome to Saul’s board, Mountain. And thanks for the post.


Jeb

Long AYX at 3.81%

Explorer Supernaut

You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx
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Data prep is not why people pay for an AYX seat

People pay for the AYX seat for what you can do afterwards, and how it helps analysts and SMEs view data in a data science way to draw conclusions.

Having sat through MS training on PwrBI and Azure, I’m fully convinced both have a steep leap to move from data prep to drag and drop intelligence.

AYX has a rabid user community, intense loyalty, and a phenomenal support structure that is evident in their net promoter score, their user community, their net retention rate, and their revenue growth.

Until those levers change, I’m bullish on the market, the growth of the TAM, and AYX ability to grow into the opportunities they are creating.

I appreciate any counter views, but simply put, the cost of a product is not the only brand differentiator, which is what the OP alleged.

Patagonia, Apple, etc, etc.

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Thanks, Ethan.

Regarding gross margins at 90%, I have an observation and a question:

  1. Cloud-based SaaS companies have cloud infrastructure costs that run through cost of sales. As AYX is primarily on-premise, it does not have much in this area at present. Should AYX become a cloud-based platform, that would likely change.

  2. One thing I always wonder about AYX is how they price the spatial/demographic/firmographic data they sell. (e.g. TomTom, DigitalGlobe, Experian, D&B, Census Bureau) Is there a significant mark-up or is it pass-through?

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