Shares of low-code software development platform Appian (NASDAQ:APPN) exploded higher in the fourth quarter of 2020. The stock price is up some 200% since the start of October, getting a massive lift as traders betting against the technologist closed down their positions, creating a short squeeze

Given the premium price Appian now trades for, a lot was riding on its fourth-quarter 2020 report and initial outlook for 2021. Expect plenty of volatility ahead, but Appian nonetheless remains a top software development and AI investment for the long term.

Low-code paired with AI in high demand

Though many of its customers and potential customers were deeply impacted by lockdowns to slow the spread of COVID-19, Appian ended up having a pretty good year. Subscriptions to its library of software development toolkit was the primary driver of growth as well as the expansion of gross profit margin on services rendered. As expected, as Appian adds more users and reaches a more efficient scale, it's quickly narrowing the gap on adjusted EBITDA and free cash flow breakeven. 

Metric

2020

2019

Change

Subscription revenue

$199 million

$151 million

32%

Total revenue

$305 million

$260 million

17%

Total gross profit margin

70.9%

64%

6.9 pp

Adjusted EBITDA

($16.8 million)

($29.3 million)

N/A

Free cash flow, including cash paid for acquisitions

($15.0 million)

($41.3 million)

N/A

Pp = percentage point. Data source: Appian.  

Appian competes against some heavy hitters in the low-code development space -- salesforce.com, Siemens subsidiary Mendix, and other smaller upstarts. But it continued to add plenty of new users (167 new subscription customer additions, 50% growth over 2019) with its ecosystem of developer partners contributing the lion's share of this growth (70% of the new customers acquired were through its partner ecosystem). And within its subscription revenue total, the cloud-based revenue retention rate was 119%, implying existing subscribers spent 19% more with Appian than they did in 2019.

Three people in an office looking at a computer monitor.

Image source: Getty Images.

Don't back up the truck, but...

Management expects total revenue to increase at a similar pace as it did in 2020 -- driven by at least a 30% increase in cloud subscription revenue. Appian tends to underpromise and overdeliver, though, and it will be lapping depressed financial results from the start of the pandemic last year in the coming quarters. Suffice to say Appian's double-digit percentage growth story remains intact. It also had $222 million in cash and equivalents, $36.1 million in long-term investments, and zero debt on the books, a clean balance sheet it can put to use to promote its expansion in the new digital-first world that is emerging.  

Clearly Appian is a top tech and AI business for the long haul, but is it worth paying some 46 times trailing 12-month sales to own a piece of it (or 39 times expected 2021 sales)? Probably not if you're looking at the company's immediate-term prospects. Shares could be due for a sizable pullback dependent on how 2021 plays out. 

However, automation software -- especially AI tools like Appian got itself into early last year -- are a nascent industry expected to be worth hundreds of billions in global annual spending by the end of the current decade. And as is often the case with fast-growing tech firms like Appian, the company could use its premium-priced stock as a type of currency (by issuing new shares) to make acquisitions or raise additional cash for research and development. In a fast-moving industry like this, I expect Appian to do just that.

Granted, Appian is likely to have a volatile share price. Bear that in mind before pressing the buy button. Any purchase should be kept modest, and with the intent of holding for the long term (say five years or more). Nevertheless, at the very least it's worth keeping this top tech outfit on your radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.