Please ensure Javascript is enabled for purposes of website accessibility

Why Appian Stock Is Plunging Today

By Brian Feroldi - Updated Feb 21, 2020 at 2:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares fall after the company's quarterly results and guidance come up short, but there's more to the story than meets the eye.

What happened

In response to the company announcing fourth-quarter 2019 results that missed the mark, shares of Appian (APPN -2.35%), a software-as-a-service company focused on low-code software, fell 21% as of 2:36 p.m. EST on Friday.

So what

Appian adopted a new accounting standard called ASC 606 in 2019 that makes its year-over-year comparisons a bit wonky. That's because ASC 606 alters the timing of revenue recognition when compared with its old accounting standard (called ASC 605), which negatively affects Appian's revenue and profitability.

Investors need to remember this when looking at Appian's fourth-quarter results, but here are the headline numbers from the period as presented in ASC 606, the new accounting standard: 

  • Subscription revenue was $42.1 million. This figure was at the low end of management's previously communicated guidance range.
  • Total revenue was $68.6 million. This was slightly below management's guidance range and behind the $69.7 million that analysts were expecting.
  • The subscription revenue retention rate -- a measure of customer spending from period to period -- was 115%.
  • Gross margin was 67%.
  • Adjusted net loss was $7.4 million, or $0.16 per share. That figure was higher than management's guidance range and worse than the $0.14 adjusted loss per share that Wall Street had predicted.

These numbers might not sound great, but they look better when viewed through ASC 605, which is Appian's old accounting standard. Under ASC 605, Appian outperformed its guidance ranges (and Wall Street's estimates) across the board.

Bar chart with arrow crashing into the ground

Image source: Getty Images.

Here are the headline numbers for the full-year 2019 as presented in ASC 606:

  • Revenue was $260.4 million.
  • Gross margin was 65%.
  • Adjusted net loss was $34.1 million, or $0.52 per share.  

Turning to guidance, here are the numbers being shared with investors for the upcoming quarter (in ASC 606):

Metric Q1 2020 Guidance Range Implied Change
Cloud subscription revenue $27.8 million to $28.1 million 31% to 32%
Total revenue $71 million to $71.5 million 18% to 19%
Adjusted EPS (loss) ($0.18 to $0.20) N/A

Data source: Appian.

For context, analysts were expecting $70.8 million in total revenue and a loss of $0.12 in adjusted EPS, so the guidance looks mixed by comparison.

It's a simliar story with the guidance for the full year 2020:

Metric 2020 Guidance Range
Implied Change
Cloud subscription revenue $121.3 million to $123.1 million 28% to 30%
Total revenue $296 million to $298 million 14%
Adjusted EPS (loss) ($0.55 to $0.58) N/A

Data source: Appian.

Wall Street was expecting $309.3 million in revenue and an adjusted net loss of $0.36 a share, so this guidance looks really weak. But management pointed out that the switch to ASC 606 will reduce its 2020 subscription revenue by about $8.8 million, so the numbers are not as bad as they appear.

Nonetheless, traders seem to be disappointed with the company's quarterly results and guidance, and are selling off the stock. 

Now what

Appian's stock reached an all-time high earlier this month, so Wall Street was probably pricing in strong results across the board from this high growth stock. Appian failed to deliver on those lofty expectations, so it makes sense that the company's valuation is being reset today.

The good news for investors is that the long-term thesis for owning this stock continues to look intact. While the adoption of ASC 606 might slow down Appian's growth rates in the near term, that impact will lessen in the next few quarters.  

In other words, if you believe that the shift toward low-code software is still in its infancy, then today's drop might represent a nice opportunity to get in.

Brian Feroldi owns shares of Appian. The Motley Fool owns shares of and recommends Appian. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Appian Stock Quote
$53.16 (-2.35%) $-1.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.