In this segment of "Beat and Raise" recorded on Oct. 8, Fool contributors Jeremy Bowman and Nicholas Rossolillo size up Appian and the rest of the low-code sector and say how they would invest in today.
Nicholas Rossolillo: I know for myself personally, I'm still taking a pretty cautious approach. One thing I like to do with not just companies like Appian, but if there's a whole movement going on, a whole industry that is experiencing growth and getting lots of attention. Like Pegasystems, UiPath, Salesforce, I'd even throw Wix in there just to go back to the Wix again. It doesn't do the same thing, but it's still a no-code platform that makes development of software a cinch for everybody, even if you don't know anything about code, taking a basket approach and maybe just buying a group of stocks in that universe just to take it easy and see what happens, see who emerges the winner and gradually over time, adding to the best of the best along the way. The losers will just fade to the background. But if you stay focused on the best of the best within an industry, within a movement and add a little bit of money over time to it, that's the approach I take. I'm neutral personally on Appian right at the moment, so I've owned it for over three years now. Overall, I'm up even though the last year has been incredibly volatile, but I'm not worried about it. It's still in the portfolio, but it's part of a basket, a mix of these low-code, no-code development platforms that I think are going to do well in the next decade.
Jeremy Bowman: Yeah. We've got a couple of questions about is this a good time to buy the stock? Market timing is always difficult. I think even timing your entry into a specific stock is the same thing. I think that's especially true with a company like Appian. The thing about we're long-term investors at the Fool and thinking about long-term growth kind of company, I don't think you'll ever know when the long term really starts or when it accelerates. I don't think [laughs] the companies know either, they're plugging away, their model's working, the pandemic helped accelerate it. I think something like that in the past was Amazon. I remember in 2014, Amazon was still unprofitable, the conventional take was, well, Amazon's never going to be profitable. It had been around for 20 years, and then boom, suddenly AWS, Amazon Web Services, the cloud computing service takes off and they pick up advertising, the third-party marketplace and everything gelled this far as the bottom line and the stock, it was doing well before then. [laughs] There's definitely no doubt that the company can be profitable.
I think with Appian, the low-code, the growth path, I think it's definitely one of the industries you want to be in over the next decade. I know it's frustrating if you've lost money on the stock over the last year since it fell from that peak, but I think if you think of it on a five- to 10-year time frame, I think it'll be a good market beater. Also, with the company, too, they're very conservative in the guidance and that sort of thing, too. I almost wonder, you don't want them to overpromise and underdeliver, of course. But I think they're not the kind of company that really is tooting their own horn. I think maybe if they did a little more of that, they might get some more attention from Wall Street or could trade for a little higher. Ultimately, you want to see that happen with the numbers. I definitely look at the next couple of quarters, it'd be interesting to see what they say about the process mining acquisition of Lana Labs. I know the company said that they're in the process of rebranding, that they're those processes mining technology under Appian. They haven't even been able to sell it as part of their suite, their local platform. They'll be able to do that, there's a waiting list for customers. The customer response to that has been been great. It looks like there's a pretty strong pipeline for growth with that ahead over the next year or two, so I'll definitely be paying attention to that.
Rossolillo: To your point, Jeremy, as as long-term investors, we'd like to stay focused on not what's happening right now, but what could happen five years down the road. You talked about like Amazon, for the longest time there in the early 2010s was not profitable. The business model, that aggressive business model at reinvesting as much cash as you can back into the business. I think there were so many doubters at the time. Will this work and then when that fleshed itself out and everybody was like, well, not only does this work, but look at how successful Amazon has been since.
A company like Appian, that's what they're trying to tap into. I'll just share one last thing off of Ycharts here just because I think it's interesting. We talked a lot about this, evolution of their business model. Pegasystems is in a similar boat, too, maybe even a little bit more so because they're a legacy company. But these are gross profit margins, so it's just the profit on the product sold itself or the service sold itself. I throw UiPath up here. Specifically, because they're that targeted business model that Appian is headed for; almost pure subscription-based to the Cloud platform, gross profit margin of over 80 percent. You can see the differential, if they get there, we're talking 10 percent or more gross profit margin in the years ahead.
Like you said Jeremy, for every dollar they bring in, that's a lot of new money that can be reallocated to research and development, sales and marketing, and then eventually, contribute to the operating profit margin once they hit that optimal size, the optimal scale, that this is very much one of those companies where you're not going to see a definite return in the short term. By short term, I'd say three to five years. It's probably going to be a very very wild ride. It continues to be a very wild ride like it has been. So don't get too aggressive with these companies. The story is great, that sounds fantastic, and I think it is. They're helping solve some really big problems for really big businesses that need help automating their stuff, automating app development and software process development. Good stuff. But it's going to take time for Appian's business model to demonstrate the power of what they're doing. It's just not going to be a quick overnight success story. It's going to take some time.