Appian has been treading water for the past six months, recording a small return of 3.4% while holding steady at $31.49. The stock also fell short of the S&P 500’s 17.7% gain during that period.
Is now the time to buy Appian, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Appian Not Exciting?
We're swiping left on Appian for now. Here are three reasons we avoid APPN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Appian grew its sales at a 16% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Appian’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Appian’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7% for the last 12 months will decrease to 4.5%.
Final Judgment
Appian isn’t a terrible business, but it doesn’t pass our bar. With its shares underperforming the market lately, the stock trades at 3.2× forward price-to-sales (or $31.49 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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