Is Appian Stock a Buy?

Cloud-based software-as-a-service (SaaS) provider Appian (APPN 4.19%) just reported second-quarter 2018 results which exhibited strong top-line growth, although operations continue to lose money. The stock hasn't been around for a long while, as Appian went public in the spring of 2017, but shares have had an impressive run since their debut. Though owning a piece of Appian isn't for every investor, its losses shouldn't deter those looking for a long-term growth play in the technology space.

A recap of performance

Appian provides a low-code software development platform, helping businesses without the resources to hire engineers (or those simply looking to speed up the development process) build apps, websites, and other software. Rather than requiring line-by-line coding, Appian's visual tools look more like a flow chart, and the service is set up so that even those with limited coding knowledge can build applications. That is a valuable resource in a world where software engineers are in short supply.

Since going public, Appian has reported admirable growth. Trailing-12-month revenues are up more than 40% during that time, and the stock has followed suit:

Data by YCharts.

The top-line trend remains vigorous as year-to-date in 2018, demand for Appian's cloud-based development tools and other professional services remains strong. The company's subscription revenue retention rate in the second quarter of 2018 was 119%. Revenue retention measures the dollar volume growth of retained services, versus the number of customers retained. A reading in excess of 100% indicates that customers are on average increasing their spending with Appian. Below are some additional key metrics: 

Data source: Appian quarterly earnings.

Don't sweat the red

The company's top line looks great, but what about those losses? Appian's gross margin north of 60% is getting gobbled up and then some by operating expenses, making for an ugly-looking bottom line.

Before tackling that, it's first worth acknowledging that Appian's subscription services carry a much higher gross profit margin than the labor-intensive professional services: Gross margin in the two revenue streams hit 91% and 30%, respectively, in the second quarter. However, has Appian chosen to build out its professional services division, which converts to revenue faster, to help fuel its overall business. Subscription services take longer to convert into revenue, yet the profit margins are extremely high.

Image source: Getty Images.

Subscriptions, software and support is now the faster-growing segment, and it's contributing more gross profit by far. To help speed up overall revenue expansion, Appian has dumped $50.3 million into sales and advertising so far this year. That's 45% of total sales, and it doesn't include another 18.5% of total sales being invested in research and development.

These two line items explain the losses at Appian. While seeing that much red may be alarming, the context shows a company that is investing in itself and getting rewarded with double-digit revenue growth.

For 2018, Appian expects its full-year subscription revenues and total revenues to increase 34% and 21%, respectively, from 2017. Professional services growth is slowing down and is the primary drag on the overall figure -- some of the upward trajectory the company has enjoyed as of late is expected to cool off during the back half of the year. However, while operating expenses keep expanding, the percentage loss compared to sales is slowly edging lower. 

Appian's stock can be a volatile ride as a result of its ambitious growth endeavors. As the company funnels cash to its sales engine, changes in the momentum of new client acquisition and existing client spending -- specifically on the software subscription side -- can cause big advances and declines in share price. Investors should therefore be cautious before making a purchase, and those who can't stomach the gyrations or who have a shorter time before they need their money should exercise caution.

For those seeking a long-term growth story, though, Appian looks like a solid option. In a world where digital transformation is happening at breakneck speed, the company's low-code services could play an increasingly important role in helping organizations which are trying to keep up. Just remember to keep bets on Appian small to manage the risk.