Appian: The Pullback Is Creating A Long-Term Buying Opportunity

Summary

• Appian's stock has not performed well lately but the company's long-term bull case is still intact.
• Appian is a low-code, small-cap technology company that is worthy of investment dollars.
• I am long Appian and I plan to build the position in the months/quarters ahead.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

Appian Corporation (NASDAQ:APPN) is a small-cap company that I own in the R.I.P. Portfolio. Appian has performed well since the company IPO'ed in mid-2017 but the stock has significantly underperformed the broader market on a YTD basis.

APPN data by YCharts

While the stock has not performed well over the last 10 months, I still believe that Appian has great long-term business prospects. Therefore, I view the recent pullback as a buying opportunity if you are willing (and able) to hold onto the stock for the next three to five years.

About The Business

Appian is a 'low-cost, low-code' software development company that allows customers to develop applications on its platform. The company's customers are able to use its cloud-based platform to code apps and Appian's approach - simplistic coding that allows for people with limited coding knowledge to easily design, build, and implement apps at attractive prices - really sets itself apart from competitors.

Appian has significantly grown its top line since the IPO and I believe that the future looks just as bright.

APPN Revenue (Annual) data by YCharts

More importantly, the company has been able to keep the growth going over the last few quarters, as shown by the fact that Appian again reported a top line beat in its most recent quarter. The company reported an adjusted loss per share of $0.14 (beat by $0.03) on revenue of $59.88M (beat by $9.61M) for Q2 2018.

Financial highlights from the quarter:

It is all about building and expanding at this stage, so there was a lot to like about the company's operating results. 39% YoY revenue growth is something to write home about it, and let's not forget that the net revenue retention figure (119%) shows that management is keeping customers happy.

On the negative front, the consolidated margins declined by 100bps (from 65% to 64%) but I do not believe that this is a significant concern given the fact that Appian is still early in growth mode. Earnings, or lack thereof, are taking a backseat and I believe that this will likely be the case for at least the next 12-18 months, if not longer.

It is also noteworthy that one firm, Abdiel Capital Advisors LLC, holds a material stake in Appian.

Source: Fidelity

Having a steady hand own a large chunk of shares should give management time to see their strategy through without worrying about investors jumping ship over short-term noise because, make no mistake about it, Appian is a long-term story.

The Thesis

Projections for the low-code market are all over the place but almost every estimate supports the case that the market is expected to experience tremendous growth in the years ahead. For example, according to ResearchandMarkets, the low-code development platform market is expected to grow from $4.32B in 2017 to $27.23B by 2022 (CAGR of approximately 44%).

Appian has consistently reported broad-based growth and it does not appear that this company will slow down anytime soon. It also helps that the recent earnings report shows that not only is Appian meeting the needs of its current customer base but that the company is also signing on new customers to material deals.

Business highlights from Q2 2018:

Nine $1M plus customer wins is meaningful for this small-cap company. Additionally, management expects for Appian to have a strong finish to 2018. It is also important to note that Appian has a strong balance sheet that should support management's long-term growth strategy.

Source: Q2 2018 10-Q

Observations:

• Current ratio of 1.3 (comfortably above 1).
• Appian has the capacity to significantly increase its financial leverage, as the company still does not have a debt balance.
• Total deferred revenue is still in the high-$80M range, which bodes well for the company’s near-term prospects.

Simply put, Appian is well-positioned to benefit from the tremendous amount of growth that the low-code industry is expected to experience over the next decade plus. Moreover, in my opinion, digital is the future so it pays to be invested in a company that helps non-tech (and tech) people develop applications that are vital in today's environment.

Word From The Street

Per Yahoo! Finance, the Street rates Appian as a "Hold" but the average price target is $30.00 per share (approximately 20% higher than today's price).

And Barclays recently upgraded Appian to "Equal Weight" with a price target of $29. I tend to agree with the Street in that I definitely see upside potential but the stock will likely be under pressure in the near term, especially if the broader market continues to pull back.

Risks

A downturn in the broader market will likely cause APPN shares to be under pressure. A recession will be terrible news for a company like Appian.

The company also operates in a highly competitive industry so the major players with deep pockets have the potential to derail Appian's long-term plans. Lastly, another company-specific risk is the potential for equity dilution - see the company's latest stock offering news here.

Bottom Line

Appian's stock has not performed well lately but I believe that the company's long-term story is still intact. Digitalization is taking over the global economy so, in my opinion, Appian's cloud-based business puts the company in a great position to benefit from several major trends. As such, I believe that investors with a time horizon longer than 2 years should consider adding Appian at current levels.

Author's Note: All images were taken from Appian's Q2 2018 Earnings Presentation, unless otherwise stated.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long APPN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.