Investors looking to add growth stocks to their portfolio would benefit from taking a look at Appian (APPN 1.52%). With revenue estimated to grow by double digits and an ever-improving bottom line, Appian shares are likely to move higher in 2020, if the broader markets continue to reach record highs.
Appian targets the automation space in the global enterprise technology market, providing a low-code software development platform that enables enterprises to develop applications. Using Appian's products, software developers can easily drag and drop pre-built code lines, accelerating the app-development process.
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Appian stock has been volatile
Appian shares went public in May 2017, and the stock has gained more than 350% from an IPO price of $12 in just under three years. However, shares are trading about 14% below their record high.
Several high-growth tech stocks have been trading lower over the past few months as investors showed concern over high valuation metrics. Appian, though, has had a strong start to 2020, returning 29% in the first half of January.
Subscription sales expected to drive growth
Similar to other enterprise-facing companies, Appian focuses on a subscription-based model to drive revenue. This approach ensures a stable stream of recurring revenue and helps companies maintain a buffer during a market downturn.
In the quarter containing September, Appian's subscription sales were up 38% year over year to $40.4 million, while professional services sales grew 27% year over year to $27.8 million. Subscription sales accounted for 60% of total sales in the third quarter of 2019.
The company's revenue growth in that quarter was primarily driven from the Europe, Middle East, and Africa (EMEA) region, where subscription revenue was up by a significant 65%. In fact, EMEA's subscription sales had notably grown by 60% in the first two quarters as well.
The EMEA region accounted for over 30% of Appian's new logos in the third quarter. That includes one of Europe's top superstore chains, which purchased Appian's products to replace part of its legacy systems and improve coordination between its marketing procurement and sales teams.
Appian also signed an expansion deal with a top-10 global bank in the United Kingdom. This customer also made a multimillion-dollar Appian purchase in the first quarter of 2019 to manage regulatory changes and financial operations for its global risk services department.
The financial services vertical continues to be Appian's largest and fastest-growing segment. In the third quarter, subscription sales from financial services were up 48%.
Another key driver for Appian's subscription sales has been its high subscription revenue retention rate, which stands at 119%. That high rate indicates that the company has successfully managed to cross-sell other services to its current base of customers, expanding the average revenue per customer over the past few quarters.
Growth from partnerships and acquisitions
Appian announced its first-ever acquisition on Jan. 7, when it acquired Jidoka, a highly rated robotic process automation (RPA) platform. This acquisition will help Appian expand its product portfolio in the business process automation market. According to market research firm Forrester, the RPA market is expected to touch $12 billion by 2023.
Several organizations are still in the nascent stages of RPA implementation. Appian believes that enterprises have employed tools from multiple RPA vendors, resulting in a fragmented landscape with multiple players. There are also concerns over robot security and governance, which have affected the implementation of RPA solutions.
Appian will integrate low-code development and RPA in a single automation platform. The company will also deliver RPA governance capabilities to enterprises, allowing them to manage robotic workforces from major RPA vendors.
On Jan. 14, Appian announced a partnership with Celonis, a market leader in the artificial intelligence-enhanced process mining and process excellence software segment.
Appian will now integrate its low-code automation platform with the mining technology of the Celonis Intelligent Business Cloud. The company expects the partnership to accelerate digital business process transformations and process improvements for joint customers.
The verdict
Wall Street expects Appian sales to reach $363 million in 2022, up from $227 million in 2018. Though still unprofitable, the company is increasing profit margin at a fast pace. Analysts expect EBITDA to improve from negative-$28.6 million in 2018 to negative-$6.8 million in 2022.
Appian is valued at $3.3 billion in terms of market cap, 12.5 times forward 2019 sales. Though Appian stock is trading at a premium valuation, its robust subscription sales will help drive long-term revenue growth and positively affect profit margins.
Appian's subscription, software, and support business reported gross margin of 90% in the third quarter, while the professional services business reported gross margin of 31%. The overall gross margin for Appian stood at 66% in Q3, up from 64% in the prior-year period.
Finally, the company's acquisition of Jidoka will help it gain traction in the high-growth RPA space, making it a solid pick among small-cap growth stocks in the technology sector.
