Appian (NASDAQ:APPN) and its low-code software development platform are on a tear this year. Shares are up 50% as of this writing -- although they were up as much as 140% on the year before a late-summer sell-off in high-flying cloud stocks brought them back down to earth. Still, for those who got in at the start of the year or earlier, it's been a rewarding journey. In the third-quarter earnings report, Appian put up numbers to help support its run. The stock is still looking a bit frothy to me at this point, but there's plenty to like about this company for those willing to stick with it for the next decade.  

It's all about the subscriptions

Appian helps organizations quickly build new software applications, even if an organization is short on help in the IT department. Several developments have coalesced to prop up demand. First, digital transformation is picking up pace around the globe. Digitally based operations have proven their merits, and businesses and government entities are quickly trying to update their legacy systems for the modern era. Second, as digital needs have grown, IT professionals have become hard to come by. Appian aims to simplify and speed up the development process with a drag-and-drop toolkit for building apps, usable even by those short on techie know-how (and especially powerful for those who do have the know-how).

This cloud-based toolkit is available via a licensed subscription, and revenue derived from such means grew 38% in Q3 to $40.4 million. Paired with other software and support sales, that segment was up 35% year over year. That's significant as this portion of Appian carries incredibly high profit margins compared to its professional services (which grew 16% in the quarter to $27.8 million).  

A laptop, smartphone, and cup of coffee sitting on a table in front of a window with the morning sun shining through.

Image source: Getty Images.

Having taken over as the biggest generator of sales this year, Appian's toolkit in the cloud is raising the bar for overall gross profits on product sold and services rendered -- providing plenty of optimism that there will be an eventual bottom-line payoff.

Metric

9 Months Ended Sept. 30, 2019

9 Months Ended Sept. 30, 2018

Change

Subscription, software, and support revenue

$116 million

$90.9 million

28%

Total revenue

$196 million

$167 million

17%

Subscription, software, and support gross profit margin

89.5%

90.4%

(0.9 pp)

Total revenue gross profit margin

63.7%

62.3%

1.4 pp

Adjusted earnings (loss) per share

($0.40)

($0.39)

N/A

Data source: Appian. Pp = percentage point.  

Time to buy the dip?

Guidance for the fourth quarter was pretty good, too, with total revenue forecast to be up at least 24% year over year. Although adjusted losses will persist, it's all about growth now and profit later at Appian. And why not? CEO Matt Calkins talked about his company's momentum on the last earnings call, citing a subscription revenue retention rate of 119% (implying existing customers spent an average 19% more than a year ago), as well as a 65% year-over-year increase in revenue in Europe, Middle East, and Africa; a 48% increase in subscription revenue from financial institutions; and a 50% increase in U.S. federal sector spending. As a result, full-year 2019 subscription revenue is expected to end up being at least 33% higher than 2018.

With the high-margin subscription segment sailing the ship, this one is surely a buy, right? For those looking long-term, I think Appian certainly has a lot to offer. Low-code software development is helping fuel digital upgrades for a large variety of businesses. With IT teams stretched thin, it doesn't look like the demand is going anywhere anytime soon.

Nevertheless, while I still think Appian is a rock-solid bet over the next 10 years, I'm not a buyer at the moment (although I do own shares). Cloud stocks are getting realigned with reality -- Appian included. Its 50% stock price surge this year still outpaces its total and subscription-only sales increases, and the stock trades for 11 times full-year 2019 expected sales. Price to sales is a subjective and imperfect metric, but suffice it to say, 11 is a somewhat high number. Put simply, bottom-line black is still likely a ways off, so expect further volatility ahead for Appian as investors try to digest the company's potential.

At the very least, though, investors willing to stomach the ups and downs for the long haul should have the software outfit on their watch lists. If the company can maintain its subscriptions momentum, shares will continue to trend higher. In the meantime, I think the stock could have a little more air let out of it before its pullback is complete, given that price has outpaced actual results. But the time is drawing near when I will be interested in scooping up some more. Stay tuned.