Did Appfolio (APPF 2.06%) come up at your last Zoom video happy hour or virtual family gathering? I'm guessing it probably didn't. Since it's not a consumer-facing company, it's not widely known, and its name doesn't even help you understand that it provides software for property managers and legal firms to manage their businesses. But for investors who are interested in a growing software specialist, this is one under-the-radar stock that is worth getting to know.
Let's take a peek at this niche software-as-a-service (SaaS) provider, see what it's doing to help customers get through the coronavirus, and look at why it's an attractive investment today.
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Strong history of growth
Its property management software makes up over 90% of the top line and covers all aspects of the rental life cycle. Property managers can use the tools to develop and follow up on leads, screen tenants, manage the application process, collect rental payments, and manage maintenance requests. It's grown its property management customers by 43% over the last three years. The number of rental units under management has increased by 73% over the same time period. These two factors together have driven 30%-plus revenue growth over the last three years.
|
Metrics |
2017 |
2018 |
2019 |
Q1-2020 |
|---|---|---|---|---|
|
Revenue |
$143.8 million |
$190.0 million |
$256.0 million |
$72.5 million |
|
Year-over-year growth |
36.2% |
32.2% |
34.8% |
27% |
|
Net income |
$9.7 million |
$20.0 million |
$36.3 million |
$2.0 million |
|
Year-over-year growth |
N/A* |
105.5% |
81.7% |
(46.8%) |
*Note: 2017 is N/A due to 2016's full-year net income loss and Q1-2020 is a decline from the previous year due to favorable tax gain of $4.3 million in Q1-2019. Data source: Company SEC filings. Table by author
But the company isn't done growing. Leadership estimates the total addressable market for its property management software to be $5 billion annually and an additional $2 billion for its case management software for legal firms. That means it's tapped less than 4% of the market and has plenty of room for growth. But for the upcoming year, it has withdrawn its revenue growth projections given the uncertainty of how COVID-19 will impact the business. But that doesn't mean the company is standing still.
Innovating through COVID-19
Appfolio has implemented key platform enhancements to help customers during this challenging time. Virtual showings, enhanced communication tools, and an upgraded payment system make the platform even more valuable now that social distancing practices are the norm. In its most recent earnings call, CEO Jason Randall relayed accolades from one of its large customers. In Randall's words:
I am so thankful that we run our business on AppFolio. We could not have taken the steps to protect our office, maintenance and corporate teams without AppFolio Property Manager PLUS, as it lets residents make payments and submit work orders online while our team can communicate with our residents and pay vendors remotely.
These responsive enhancements are improving the usability of the platform for the long term and will help retain customers. With growth over the short term as an unknown, it's providing an opportunity for long-term minded investors.
Short-term uncertainties provide an opportunity
Randall indicated in the most recent results call that "it is presently unclear whether the cumulative impacts [of COVID-19] will be positive or negative." It may be surprising to some that a downturn wouldn't automatically impact the company negatively, but a look at its customers will reveal why this may not be the case.
As of the first quarter, it had 14,729 property management customers with 4.8 million units under management. This would mean the average customer has around 326 rental units. Even though the company may have some smaller customers that could see financial hardships, on average, its customers should be pretty stable given the large base of units each one has. It's also possible that these larger property managers could opportunistically buy additional properties that get into financial trouble and increase the units under management on the platform.
The stock handed investors a tremendous 86% gain in 2019 and continued its run in early 2020. But now, it's pulled back more than 10%, providing a nice entry point for investors with a long term view. But like other SaaS stocks, it sports a double-digit price-to-sales ratio of 16.5, making it unattractive for the value-focused investor. This P/S ratio is high enough that the stock could suffer if upcoming quarterly results come in below analyst expectations.
So what should interested investors do?
Short-term uncertainty, but a solid long-term play
A looming recession and skyrocketing unemployment will cause people to cut back on discretionary spending, but everyone still needs a roof over their heads. The rental market may contract as people choose to move in with friends or relatives to save money, but the U.S. will eventually get back to work. When that happens, the rental market will pick back up, and this strong niche software specialist will thrive and grow. Investors would do well to take a bite of this growth stock now and add to their position over time.
