Why Did Alteryx Stock Fall 29% in August?

What happened

Shares of Alteryx (AYX 2.76%) dropped 28.8% last month, according to S&P Global Market Intelligence. The company’s quarterly earnings results revealed dramatically slowing sales that came in well below expectations. That’s a recipe for disaster for high-valuation growth stocks that rely on bullish investor sentiment about the future.

So what

Alteryx reported just 4% revenue growth in the second quarter, which was nearly 8% lower than Wall Street’s expectation. The company’s 22% growth in annual recurring revenue (ARR) suggested that things aren’t quite as bad as the headline figure, but the results are still worrisome.

Alteryx cited difficult macroeconomic conditions as headwinds for new bookings growth. While customer retention was high, the company is also struggling with worse-than-expected upselling. Some of its largest expansion plans with existing customers wound up being delayed or reduced, hurting the top line. These factors led Alteryx to slash its full-year revenue forecast roughly 5% to $930 million, cutting its annual growth outlook from around 15% to 10%. The company is also hiring new sales executives to combat these issues, which could be a warning sign to skeptical investors.

Image source: Getty Images.

All of this is scary to growth investors. Alteryx isn’t profitable, and it’s still just about breaking even on a free cash flow basis. It has been investing in sales, marketing, and product enhancements to fuel growth, with the promise of achieving higher scale. At a higher scale, it can generate more cash flow in the future and increase the company’s valuation. That narrative hinges on investor confidence in Alteryx’s ability to achieve growth, and recent results are casting doubt on the viability of that whole plan.

Zooming out, Alteryx is showing a clear downward trend in revenue growth that coincides with falling gross margin. This could indicate decaying demand and pricing power — potentially due to fierce competition from formidable competitors, such as Microsoft (NASDAQ: MSFT)

AYX Revenue (Quarterly YoY Growth) Chart

AYX Revenue (Quarterly YoY Growth) data by YCharts

Now what

There are still some bright spots for bullish long-term investors. Alteryx operates at roughly cash flow breakeven, it sports high customer retention, there are major growth catalysts for years to come, and its product suite receives generally favorable reviews from industry analysts. If it can accelerate growth when macroeconomic conditions eventually improve, it’s likely to generate shareholder returns. That requires a leap of faith, and the recent results don’t paint a favorable picture.

In the meantime, the company has announced that is exploring a sale to potential acquirers. The stock leaped 15% higher as a result because companies are typically acquired at a premium to their share price on the open market. The stock’s price should reflect the likelihood of an acquisition over the next few months, but it could drop sharply if it fails to find a buyer before its financial results show a clear recovery.

Ryan Downie has positions in Microsoft. The Motley Fool has positions in and recommends Alteryx and Microsoft. The Motley Fool has a disclosure policy.

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