Appian Stock: No Recovery Yet (NASDAQ:APPN)

Appian (NASDAQ:APPN) offers a low code process automation suite that encompasses data architecture, AI and RPA. The last time I wrote about Appian I suggested that the company’s valuation was not justified by its growth, efficiency, end market or competitive positioning. The stock is down over 20% since then, despite the market being up significantly over the same time frame. Appian now appears to be more reasonably valued but its growth continues to moderate and without profits to fall back on, the share price could continue to decline.

Market Conditions

A range of indicators point towards a rebound both in Appian’s business and the process automation market more generally in recent quarters. For example, Appian’s gross and net retention rate have both ticked up.

The number of job openings mentioning Appian in the job requirements has also moved higher in 2024, although is still down from the peaks of late 2022.

The number of Appian job openings has stabilized but not moved significantly higher. While this could indicate that demand remains fairly soft, it may also be that Appian is choosing to prioritize profits over growth at the moment.

Appian’s subscription business and UiPath have demonstrated similar growth trends in recent quarters, indicating the current importance of macro conditions. Both businesses have seen higher revenue growth in recent quarters, which is expected to persist in 2024.

I think caution is warranted though. In the second half of 2023, expectations of imminent interest rate cuts became the consensus and doubts about the strength of the global economy faded. This appears to have loosened the purse strings for many customers, supporting sentiment for software companies. Many organizations remain cautious though, and recent hot inflation data could create another leg down in software markets.

Appian Business Updates

Appian offers a low-code development and business process automation platform with functionality expanding into use cases like:

• Process mining
• RPA
• AI
• Data fabric

Appian expects AI to move into production in 2024, providing the company with a tailwind due to the its focus on the application of AI to data. Appian has been trying to embed AI across its platform, including low-code AI features that helps users create applications and AI training capabilities. In particular, Appian is focused on “private AI”, using RAG to reduce costs and protect privacy. I question whether Appian brings any unique capabilities in AI though.

Data Fabric is a virtual database that acts like a semantic layer for Appian’s platform. It allows data from across the entire enterprise to be accessed as if it were in the one location, even though it remains separated. Appian believes its data fabric will be an important differentiator in coming years as AI needs access to data, which can be difficult when data is scattered in silos across the enterprise. The common approach to this is a data lake or warehouse, where data from across the organization is centralized. Appian’s data fabric avoids this, providing insights while minimizing exposure and the need to move data. Something like 80-90% of Appian’s customers use data fabric.

The popularity of hybrid cloud and multi-cloud environments are increasing, which should support the adoption of data fabrics. Appian is not alone though, with companies like Microsoft (MSFT) and Teradata (TDC) also offer data fabric solutions.

Data fabric and AI are being bundled at the moment in order to drive adoption. Both products will be broken out separately next year using a stratified pricing system, which could provide Appian with a meaningful tailwind.

Financial Analysis

Appian’s revenue increased 16% YoY in the fourth quarter to 145.3 million USD, with subscription strength offset by service weakness. Subscription revenue grew 24% YoY and Cloud Subscription revenue was up 26%.

Professional services revenue was down 9% YoY, contributing approximately 20% of total revenue. Services revenue is a strategic offering that drives customer success, rather than an important business in its own right. Professional services revenue is expected to continue to decline as a percentage of total revenue over time.

Total revenue is expected to be 148-150 million USD in the first quarter, up 10% YoY at the midpoint. Cloud subscription revenue growth is expected to be 21-23%. For the full year, total revenue is expected to be 615-617 million USD, a 13% increase at the midpoint. Cloud subscription revenue growth is expected to be 20%.

Appian’s cloud subscription revenue retention rate was 119% in the fourth quarter, continuing its recent increase.

The company is seeing stronger growth amongst larger customers, particularly those with greater than 1 million USD ARR. The total contract value of Appian’s top 10 net new software deals also increased by 70% YoY in Q4.

Appian’s gross profit margin continues to increase as the importance of its services business declines. The company’s gross profit margin should gravitate towards 90% as subscription revenue growth continues to outpace services growth.

Despite rising gross profit margins, Appian is still not profitable as the company has been investing in R&D and sales and marketing expenses remain high. Appian appears to have shifted focus towards profitability over the past 12-18 months though. Given Appian’s high gross retention rate I expect that the company will eventually end up with operating profit margins in the 15-20% range.

Conclusion

After the recent decline, Appian’s stock now appears attractively priced relative to comparable companies. It should be kept in mind that Appian’s growth continues to moderate though, and that the company is still relatively dependent on services for revenue. Near-term performance will likely be dictated by the response of customers to the realization that interest rates are likely to remain elevated unless there is meaningful economic weakness. This likely means that Appian’s stock will remain under pressure in coming months.