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As Appian Surges to All-Time Highs, Here's What Investors Should Do Next

By Nicholas Rossolillo - Aug 26, 2019 at 9:33AM

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The software stock has more than doubled this year. Expect volatility ahead.

Appian's (APPN 1.41%) stock is on fire. After reporting second-quarter 2019 results, shares of the low-code software developer have gone from a rebounding casualty of the 2018 stock market pullback to a triple-digit year-to-date winner. As of this writing, Appian is up 130% this year alone.

The recent buoyancy is due to the optimism surrounding the company's cloud-based software development service, aimed at helping organizations crank out new apps and digital tools faster and more efficiently. The highly profitable segment holds a lot of promise, and though new investors may want to tread lightly after the recent surge, this is a stock for the long haul.

Low code taking the controls

Total revenue in the second quarter grew 12% year over year to $66.9 million. Subscription revenue -- made up of access fees earned from Appian's low-code software development library -- was the real story, though, increasing 41% over the second quarter of 2018 to $38.0 million. The adjusted net loss during the quarter shrank to $6.6 million, compared with net losses of $8.8 million a year ago.  

Paired with Q1 results, Appian is piecing together a pretty good year, building on its strong 40% subscription software growth posted in 2018. Lumped together with software and support services, the segment is delivering solid returns for shareholders and above-average profit margins.

Metric

Q1 2019

Q1 2018

Change (YOY)

Subscription, software, and support revenue

$74.2 million

$60.0 million

24%

Total revenue

$126.5 million

$111.6 million

13%

Subscription gross profit margin

89.7%

90.9%

(1.2 pp)

Total revenue gross profit margin

62.8%

61.8%

1.0 pp

Adjusted earnings (loss) per share

($0.42)

($0.34)

N/A

YOY = year over year. Pp = percentage point. Data source: Appian.

Though overall revenue is underwhelming because of flatlining in other income sources, the big bump in subscription software is welcome news. Carrying a 90% gross profit margin and growing well into the double digits, its is quickly taking over as the main driver of Appian's results. If it can maintain its current pace, Appian is on track to become a highly lucrative business proposition.  

The developer of the future?

Management said it expects total revenue to reaccelerate in the third quarter to at least 18% year-over-year growth, and for full-year revenue to grow at least 15%. That's due to the subscription segment, which is expected to maintain a north of 30% rate through the end of 2019.  

A group of office workers looking at a computer screen displaying graphs.

Image source: Getty Images.

But have investors missed the boat? There's no denying that shares are pricey, especially given that Appian isn't profitable yet -- even on an adjusted basis that backs out non-cash stock-based compensation. Investors are left with the price-to-sales ratio, which is at 16 for Appian -- steep, but not unheard of for a high-flying tech outfit. Basically, investors are betting on the future when buying in, not the here and now.

The company has competition, including from the likes of salesforce.com, which offers low-code app development through its software platform segment. However, there's plenty of new business to go around for everyone. According to Transparency Market Research, low-code software development spending is expected to grow an average of over 50% a year through 2025 -- at which point low code would be an industry worth tens of billions every year.

So should new investors buy in now? Yes, assuming they're in for the long haul and plan on making more subsequent purchases to build out a position over time. Given how small Appian still is and its fast rate of expansion, this one is going to be very volatile. Nevertheless, by all indications low code has a bright future, as businesses are scrambling to develop the digital tools they need, and this small outfit is taking advantage of the trend.

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