Appian
The very first memo I wrote on Commonstock was a cursory muse mentioning Appian.
Today, Appian eclipsed Square as my largest holding. It's been on a huge run in the last month.

What Does Appian Do?
Appian helps businesses make apps. They are a leader in low-code automation.

Why is That Special?
Businesses need a mobile presence, but mobile app development is expensive and time-consuming. Appian allows corporate and government customers develop their own apps and software with minimal in-house tech resources.

How Long Have They Been Around?
A lot of people think Appian is new because they only went public in 2017. But they were founded in 1999, and founder Matt Calkins still owns 45% of the company. They are not a baby startup by any stretch of the imagination. Their market capitalization is at $13.5 billion after a massive run-up in the last month.

Tell Me Something About Management's Decision Making Abilities
Matt Calkins and the other co-founders chose to self-fund the growth of the company through most of its history (1999-2017). Instead of looking for a big exit, they are building a company they see as their life's work. To get a sense of Matt, watch this video.

Who Are Appian's Customers?
A wide variety of big businesses. 10% of the Fortune 500 are Appian's customers. Some well known customers include Deloitte, Major League Baseball, Sprint, KPMG, and Enterprise. The US government is also a customer: Homeland Security, the Treasury Department, the Food and Drug Administration, Army, and Air Force are all Appian customers.
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Why Do Customers Love Appian?
Appian "guarantees" that it can train its customer's employees to use the software in just two weeks and guarantees a working app in eight weeks at a cost of $150,000. That sounds like a lot, but if you were to develop your own app, its a steal.

What Does the Business Model Look Like?
Appian makes revenue two ways: services (one time jobs) and subscriptions. Subscriptions are more important. While services revenue has 32% gross margins, the subscription revenue has margins of 90%. The higher margin subscription revenue is growing a lot faster than services revenue.

Ok, Why Should I Invest In Appian?
Investing in Appian is a bet that businesses will continue to move towards more flexible, app-centric software. You invest in Appian if you believe Appian can get new businesses onboarded quick and then convert them to an ongoing subscription.

Essentially, you're betting that Appian's predictable, consistent subscription revenue will continue to grow. Appian has proven it can do that. Existing customers are paying more to use Appian's platform as time goes on, with a 117% subscription revenue retention rate.

How Does Recent Performance Look?
Appian just had a quarter where they beat expectations. Their third-quarter revenue was $77.3 million, which was an increase of 17% from the year-ago quarter. This beat analysts' consensus revenue estimate by 9%. They also had break-even earnings per share which beat Wall Street's consensus estimate of a loss of $0.17 per share.

So Is Now A Good Time To Invest In Appian?
Time to change gears a little. Appian's stock is up almost 200% in the last month. The stock started performing well going into earnings, and attracted a lot of short interest.

Shorting a stock is when people bet that the share price will go down, so they borrow shares and sell them. When the share price goes down, they buy shares back at a lower price. Then they return the shares they borrowed and pocket the difference.

But Appian's shares didn't go down. They went up. When Appian's performance surprised to the upside, a lot of short sellers had to buy shares at that higher price in order to return the shares they borrowed. Their scramble to buy shares and forestall greater losses added to the upward pressure on the stock's price. This is known as a short squeeze.

The point is, Appian's performance lately has been great, but part of it is due to the short squeeze, and once that dynamic plays out, you could see a sharp drop.

Essentially, all I'm saying is that I don't know if right now is a good time to buy or not. I bought in mid 2018 and have been holding ever since. I am not adding to my position right now. Now that you know more about the company you might add them to your watch-list and look to buy in on a dip.

Personally, as long as it appears businesses are using more app-centric software, and Appian does a good job of signing up new customers and converting them to subscription users, I am a happy investor.

Have you ever heard of Appian $APPN before this? What are some questions you have after learning about them?
Jon Gall's avatar
Nice write up! It’s been on my SASS watch list for awhile but I never really knew what they did. The chart had a really nice breakout and had a textbook retest and since then it’s rallied hard!
I guess my question is are you concerned that it’s now trading at 41.8x NTM revenue? Seems pretty rich given their revenue estimates, but maybe they can execute.
Jeanette Gonzalez's avatar
100% of my portfolio is in Appn #yolo however I’m not buying anymore right now.

Also Nathan, nicely written.
Nathan Worden's avatar
Great question @jongall45 . Appian is definitely richly valued right now. I’ve been thinking a lot about valuation lately and even cited it as a reason why I decided to not invest in Snowflake.

But since then I’ve been trying to wrap my head around why SaaS valuations are so high. They are hard to justify any way you look at them. I’m starting to think that SaaS stocks are beginning to be used as a store of value for wealth. If you’re adding more and more dollars to the economy, at a certain point those dollars need to go into productive uses in order to retain value. SaaS businesses are providing the growth rates and predictable recurring revenue that convinces people their dollars will be put to good use and therefore retain value.

That perspective begins to explain why there doesn’t seem to be a difference between 30x sales and 40x sales valuations. Instead of being valued in relation to the fundamentals, the stocks are being bid up as a store of value.


Nathan Worden's avatar
But to directly answer your question: yes, 41.8x next twelve months revenue DOES concern me. And I’m not buying any more Appian at the moment while the short squeeze appears to be contributing to the price increase.
Jon Gall's avatar
SASS is the new flight to safety lol. I think interest rates and liquidity have the biggest impact on the disregard for valuations. So your store of value makes sense, people gotta put their money somewhere! You make a good point also about the predictability of revenue that SASS businesses share.
Josh Worden's avatar
Thanks to you, I bought some Appian back when it was $33! Seeing it get over $200 today was pretty crazy. I'm considering selling to try to get out at a high point but I'll probably just hold
David McDonough's avatar
This is an absolutely incredible timeline/story.

Also extremely annoying because why the hell didn't I listen to you the first memo.
Nathan Worden's avatar
Haha my first memo wasn’t exactly a “buy this!” memo. I couldn’t have known that Appian would do this well over the last month or two. But yeah, it is an interesting timeline, and it will be fun to keep tabs on it.

Maybe the next time I write about it the share price will be down 40% 🤣😬😭
Amanda's avatar
Love the questions you used to frame your analysis
Nathan Worden's avatar
Thanks @amanda , I’m really enjoying the memos you’re putting out!
Grace Gruber's avatar
Great write up, I actually had never heard of this company before this. Definitely on my watchlist now.
Ambrose's avatar
Haha, congrats @nathanworden. What made it jumped? I still remembered that I told u to trim by 10% if it wasn't doing well back in June. Did u actually do it? Glad u hold it til this day.
Nathan Worden's avatar
I think the market was concerned that Appian customers would slow spending due to the pandemic. But in the last quarter it has become clear that Appian is actually helping companies adapt to the new paradigm, and that is showing up in their growth numbers. I think the key is that their cloud subscription platform that offers low code tools is growing 40% year over year- and that is a business that has 90% margins! So I think the market is starting to price in its favorite nectar: recurring revenue that is high growth, and high margin.
“Store of value”! Wow! What a narrative! When we are at the last hurray, there is always a narrative, often constantly changing one. But using “store of value” to justify a vastly overpriced stock is pretty close to the tipping point... imho
Nathan Worden's avatar
Totally agree with you- Appian's price appreciation in the last month defies logic. We're grasping at straws when it comes to justifying its valuation. The fact that I have to posit a 'store of value' for an equity speaks to how far SaaS stocks have run past reasonable valuations historically. I would love to hear your thoughts on why you think Appian reached the price it has recently. I made note of the short squeeze- any other driving factors you think are contributing to it's sky-high price?

I assume you would argue it's time to sell Appian, correct?
Correct, if I were you, I would at least take some off the table rather than holding the bag. There are so many reasons, just like I don’t know why Bitcoin broke to new high Couple of days ago. Often we don’t need reasons, we just have to know risk/reward justified or not. Sure short squeeze is one reason... option hedging maybe another one.

Btw, nice write up and nice trade!
Even in the context of SaaS, not every SaaS company is made equal. This one definitely is on the lower quality side of the spectrum, when compared with other real solid SaaS names.
Nathan Worden's avatar
That's fair, I would say Zoom, Snowflake, Crowdstrike, and Docusign are all "Higher quality" than Appian as far as SaaS stocks, just to name a few, but those are all valued even higher than Appian!

Keep in mind, I bought Appian in mid-2018, before these other companies had gone public. And when I buy, I tend to hold around 3-5 years. "High quality" on a timescale of 5 years can change a lot, and companies that are low quality right now can have unexpected runs just like Appian did.

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