It's been a wild year for Appian (APPN -3.09%). Shares of the low-code software development platform surged higher last year, peaking at a 500% return from the start of 2020 to February 2021. The reason? A short squeeze -- when traders betting against a company close out their position by buying more shares, which can lead to a fast-rising share price.
Appian got clobbered in March and April, though, falling sharply along with other high-flying tech stocks. At one point, it was down some 70% from all-time highs. But short interest has been steadily on the rise again since the start of 2021, from about 7.5% of shares outstanding sold short in January to nearly 12% as of this writing. Appian is a growing business in an increasingly important niche of IT. It looks like another short squeeze could be underway as shares have been rallying higher the last month. Here's why the stock is a buy for those with a much longer outlook.
Data by YCharts.
Fast app development, automation-economy ready
Appian is helping advance automation with its low-code software development platform. It's one of the leaders in the low-code space, but has stiff competition from the likes of Microsoft, salesforce.com, and Mendix (a subsidiary of Siemens).
Image source: Getty Images.
To bolster its capabilities, Appian bought its way into the RPA (robotic process automation) space in early 2020. RPA -- software bots that can be trained to complete tasks such as form completion and data entry -- has been thrust into the spotlight with the recent IPO of industry pioneer UiPath (PATH -1.49%) this past spring. Paired with its low-code platform for faster app development, Appian and its new RPA capability is a formidable tech offering helping businesses cope with some serious problems right now, including workforce shortages, remote employees, and inflation in some areas of the economy.
Despite competing against some deep-pocketed peers, Appian is more than holding its own. The first-quarter 2021 financial update included a 13% year-over-year increase in total revenue to $88.9 million (cloud subscription-specific revenue was up 38% to $39.1 million) and free cash flow improved to negative $3.3 million compared to negative $4.1 million a year ago (excluding the $6.1 million acquisition cost of its new RPA software).
Appian isn't the fastest-growing business around, but it's a tiny operation with lots of potential that has proven capable of avoiding getting crushed by its heavyweight peers. With the world going the way of digital operations, Appian has a bright future.
A truly ludicrous valuation?
So why all this short interest in Appian? It all has to do with valuation. With shares on the rise again (Appian is up over 70% since the trough in early May), the company's market cap currently stands at $9.3 billion. When backing out the $255 million in cash, equivalents, and long-term investments on balance at the end of March 2021, Appian is seemingly priced to perfection at 29 times trailing-12-month revenue to enterprise value. It also doesn't turn a profit yet, though that is mostly by design as the company is spending heavily to maximize expansion.
But shorting a stock like this -- even if it is overpriced based on the fundamentals -- is dangerous. Appian is still growing (cloud subscription growth is expected to be up at least 40% year over year in the second quarter), has ample cash and no debt, and has done a good job raising additional capital over the years to support its expansion (it last raised over $100 million in cash last summer by selling nearly 2 million new shares). Plus, given the dynamics in the business world right now, Appian has additional growth levers at its disposal with its low-code and RPA platform enabling businesses to streamline operations and boost profitability. It's a small company, and it could kick growth into a higher gear on a moment's notice with all that cash on hand.
Thus, a short squeeze could be underway once again for Appian. However, if you're a long-term investor (meaning you bought the company with a five-year or longer timeframe in mind) or you're mulling an initial purchase for the long haul, a short squeeze is nothing to be overly preoccupied with. If management sees fit to do so, it could use a higher share price to raise more cash like it did last summer to support further growth (either organic or via another acquisition). I have no plans to sell any of my position if shares do get a bounce from a short squeeze. The long-term potential for Appian is stronger than ever, and I'm content to be along for the ride as this heavily shorted tech company continues its run higher.
