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Should Investors Worry About Appian's Lack of Profits?

By Brian Withers and Brian Feroldi - Jul 22, 2021 at 7:45AM

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Growth companies spend profits to grow.

Early-stage growth companies tend to spend profits on growing the business. Low-code software leader Appian (APPN -1.73%) is certainly in that category. It's posted a loss of several millions of dollars in its most recent quarter, and investors are wondering if they should be worried. On a Fool Live episode recorded on June 30, Fool contributor Brian Feroldi answers a viewer question on the software specialist's negative number on its bottom line and the competition it faces in the industry. 

Brian Feroldi: There's a question here from Owen Frost: "Any concerns on Appian not being profitable? Any thoughts on the moat or lack thereof on the business. It's almost seems like any larger software player could easily enter this market. Sustainable advantage is something that concerns me on some of these SaaS [software as a service] businesses, or should I be less concerned?"

The profitability question, I have zero concern about the profitability question. Their adjusted net loss was $4 million and they have a quarter of a billion dollars in cash. The company could be profitable anytime it wanted to. The reason that it's not profitable is because it's hiring like crazy, and it's going out, and it's getting salespeople like crazy. It's really investing in its platform. That is exactly what you should want it to do at this stage of the game.

In terms of the moat, the thing to watch there is just the switching costs, or is the dollar-based net revenue retention rate remaining above 100 percent i.e. are same customers not only staying around, but are they spending more every year? You're right that it's a competitive market, and they are squaring off against Microsoft, for example, companies with big players.

But there is a big advantage I find to hyperfocus on one thing. Appian is hyperfocused on low code software, and it's one of the leaders and the first movers in this space. Also, don't overlook the founder and CEO, Matt Calkins. He is someone to bet on. He's been with this company for 20 years. I think he owns 40 percent of the stock if memory serves. So he is all in.

I own Appian stock. If you look at the business, I have no concerns about the business. Valuation, different question, but the business itself is doing well.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Appian and Microsoft. Brian Withers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Appian and Microsoft. The Motley Fool has a disclosure policy.

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Appian Stock Quote
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