What Should Appian Investors Do With the Stock Down Over 40%?

Appian (APPN -1.25%) shareholders have been on a crazy roller coaster ride recently. The stock has more than doubled over the past 12 months, but today it's down over 40% from its high. On a Fool Live episode recorded on March 31, Fool.com contributors Toby Bordelon and Brian Withers discuss how investors should think about this volatility and what shareholders should be watching with this software specialist.  

Toby Bordelon: Let's get started in on Appian here. This is one of those high-growth SaaS companies. We've seen big share price pullbacks in a lot of them. Appian is no different. I think it's down something like 45% from recent highs. But if you go back, you look back a year, it's still more than double. You bought recently. That's maybe a concern, but for those who have been shareholders for over a year, I think you're probably pretty happy with that. I know I'm very satisfied when I get a double in a year, so that's been great. You've got to expect volatility.

I think one of the things that's happening with this company, you look at their revenue, they had 31% subscription growth this past year. Their management is guiding for 30%-plus for the next year. That's fantastic. But we all know that 30% growth indefinitely is not going to happen for any company. I think when you look at these companies like this, what you've got happening is people are trying to figure out, what does this look like in a steady state? What does it look like five years from now? What does it look like 10 years from now? What does the cash flow look like?

You're going to see volatility. You're going to see volatility go up and down like this. I think you'll see these opportunities when you get a pullback, if you select the company to buy more maybe. But just remember that, embrace that. Embrace the volatility and as we get more information, we'll get a little bit better at figuring out what this company looks like a decade from now.

Q1 earnings, we're looking for those in May. One thing you want to look at here, I think, is the trend on the net loss. They're not profitable yet, but that net loss had been ticking down for a while. Came back up this past year so you want to try to look and see if that can come down again. Key question here is, how long is it going to take them to see some profitability? They've got a great balance sheet though, no debt, a lot of cash. There's no urgency there, but that is going to be a key question as to how long it takes them to be profitable.

Brian Withers: Yeah, Toby. One of the things I like about Appian is they've been able to reduce their dependency on their professional services stuff over time. Today, it's about 26% of their total overall. That's really a loss-leading segment for them. They're really playing in the professional services space to get folks up on the platform. You really want to see that revenue mix changing to the high-margin cloud subscription base, and it was around 45% in the last quarter. That's something that I'm watching going forward.

Bordelon: Yeah, I think that's right. You look at the margins on those, cloud subscriptions is about a 90% margin last year versus 37% for professional services. You definitely want more of those cloud service subscriptions.