What a roller coaster Appian (APPN 7.03%) has been on in 2021. It was a hot stock in 2020, rising in value some 324% (mostly in the fourth quarter) due to a short squeeze. But then Appian got clobbered in the spring of this year, along with other high-growth technology stocks. Another mini short squeeze in the late spring and early summer ended up only being a short-term rally. Share prices are currently down about 38.3% year-to-date.
In spite of the drama, this cloud computing business is actually doing quite well financially. And the 2021 second-quarter earnings update is proof Appian's run may not be over.
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When great earnings can't win over analysts
The most recent tumble in Appian stock following the Q2 earnings update came after an analyst at Morgan Stanley updated his investment firm's one-year price target on Appian from $91 to $95. However, $95 a share is still some 5% below where the stock is currently trading, and the investment firm maintained its underweight rating (an expectation the stock will perform poorly).
On one hand, that could be a fair assessment. Even after the drubbing shareholders have endured as of late, Appian trades for a premium 22 times trailing 12-month sales, and the company doesn't generate much in the way of profits -- at least not yet. Trailing 12-month free cash flow was negative $11.6 million after the Q2 update.
But on the other hand, a one-year price target is an incredibly short-term assessment on a scrappy little software outfit that has been growing at a double-digit percentage pace for years. Subscription revenue is now up 31% year over year through the first half of 2021 (and up 37% in Q2), and cloud-specific revenue was up 44% year over year in the second quarter to $42.5 million (just over half of total sales, with one-third of the total generated by non-recurring revenue professional services).
And as for the losses Appian generates, that is by design -- it's continuing to spend heavily to maximize its potential. And it can afford to do so. Cash, equivalents, and investments totaled nearly $250 million as of the end of June, with zero debt to offset the balance.
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A great investment for a patient investor
The story to watch here is the cloud computing segment, which is still growing at a more-than-respectable pace. Management called for the cloud unit to grow about 35% for full-year 2021 to at least $174 million.
Thanks to its strong balance sheet, Appian is able to make strategic investments to continue strengthening its platform too. Complementing its entrance into the robotic process automation (RPA) market last year, it went out and acquired small process mining firm Lana Labs. As CEO Matt Calkins discussed on the last earnings call, RPA helps businesses automate repetitive workflows. But process mining is about understanding those workflow processes and recognizing which ones would benefit from some added automation.
In layman's terms, Appian has built itself into a leading software firm helping organizations unlock the power of AI. Given how many companies are behind the curve in their digital transformation goals (developing apps, migrating operations to the cloud, etc.), there's still a very long runway for growth for Appian.
Nevertheless, this is still a premium-priced stock when looking at the most recent financial results. When considering the long-term potential, though, the big drop in Appian share prices so far this year looks like a great buying opportunity for those who can be patient. Expect more turbulence in the short term as Appian shares digest their triple-digit percentage return from 2020, but the stock will eventually continue its advance higher if the cloud business can keep expanding at a rapid pace. I plan on adding to my position after the Q2 report.
