Wall Street has turned against many recent IPOs in the second half of this year. Inflated valuations, cash-burning operations, and fears of a recession have led many investors to think twice before buying small, high-growth technology stocks.

But not so with Anaplan (NYSE:PLAN). The company's unique "connected planning" software is powering impressive results, and one year after its public debut, shares are sporting a 120% return from their first day close (and a nearly 220% return from the initial offering price). The hot streak continued in the fiscal 2020 third quarter (three months ended Oct. 31, 2019), and though this isn't a stock for the thriftiest of investors, it's one worth keeping an eye on. 

Three office workers gathered around a computer monitor.

Image source: Getty Images.

Pioneering a new software service

Before launching into any numbers, let's talk about this "connected planning" thing that Anaplan is pioneering. Anaplan makes collaborative software that connects people within an organization to a plan or other business data, helping all involved with a specific goal to work on and a way to monitor its progress. The company hopes that it can usher in a new era of intelligent organizational planning, much like Twilio helped kick off the cloud-based unified communications industry.  

Anaplan is finding plenty of demand for its wares. To illustrate the point, CEO Frank Calderoni talked about a few of the new customers signed up in the third quarter. One was a global pharmaceutical manufacturer that will make the software platform available to 3,500 of its researchers to help them keep track of drug development project cycles. Another new customer was a global airline carrier, which will use Anaplan to manage staffing and workforce scheduling. Other customers in retail, consumer goods, and manufacturing also expanded their use of Anaplan for financial and supply chain planning.  

As Calderoni pointed out on the earnings call, the world is changing fast, and companies need a leg up to stay ahead of the curve. Anaplan's system of connecting business decision-makers with each other and with the right data is working and is finding use across many different industries.

The proof is in the numbers

To further illustrate where this connected planning software segment is going, one need only look at the numbers since Anaplan went public in the autumn of 2018. After growing its revenue 43% in fiscal 2019, the company is on track to do even better this year.  

Metric

Nine Months Ended Oct. 31, 2019

Nine Months Ended Oct. 31, 2018

Change

Revenue

$249.8 million

$171.4 million

45.7%

Gross profit margin

73.3%

72.4%

0.9 pp

Operating expenses

$294.1 million

$219.7 million

33.8%

Net earnings (loss)

($112.5 million)

($98.5 million)

N/A

Adjusted earnings (loss) per share

($0.37)

($0.61)

N/A

Data source: Anaplan. PP = percentage point.  

Though it still operates at a loss, Anaplan is getting itself closer to adjusted profitability. Gross margins are on the rise as more services are rendered, and operating expenses are growing more slowly than the top line. Free cash flow (money left over after cash operating and capital expenses are paid) on the year has also narrowed to negative $23.3 million, compared with negative $48.8 million the same period last year. Cash and equivalents on the books totaled $311 million at the end of the third quarter, so Anaplan can afford to maintain its rate of cash burn for awhile.  

Nevertheless, though spending is running strong in order to to maximize growth, that is also the one drawback to this stock. Paired with a lofty price-to-sales ratio of over 22 based on the last 12 months' revenue, this will be a volatile stock. That could especially be the case if the global economy does eventually hit the skids like many have been worried about this year.  

Thus, I'm not buying at the moment, though I'll note that I have little appetite for making new stock purchases right now after the well over 20% run the broad market has had this year. While interested in this business, I am still a value investor at heart. Anaplan is on my watch list, though, as I think connected planning will be a high-growth endeavor for years to come.