Introducing Appfolio (APPF)

Note: sharing this as preliminary research, as I’m in the early stages of analysis.

I have been looking for new ideas, particularly in the range of ~20% growers that hadn’t seen as much multiple expansion (until the last few weeks). One company that I had never heard of peaked my interest moreso than the likes of UiPath, Jfrog, and Elastic…

Intro

Appfolio is a provides real-estate management software to property managers. They provide integrated stack of tools, including accounting, marketing, leasing, management, and payments. Founded in 2006, the company IPO’d in 2015 and is quietly nearly a 20-bagger since then. Shane Trigg was recently brought on to the CEO role (Salesforce and Intuit leadership experience). Both founders seem to be reducing their roles – Klaus Schauser recently transitioned from Chief Strategy Officer, to board director, to board observer; Jon Walker joined another company as CTO).

I was surprised to see them reference investments in AI back in 2021-22 before chatGPT’s inflection point. They recently mentioned they’re on their fifth year of making R&D investments in AI, which allowed them to deploy a product (AppFolio Realm) that provides a suite of capabilities.

Now, its revenue is a mix of “core services” (i.e., software) and value-added services (i.e., payments, tenant screening) so its gross margins fluctuates in the low 60%s.

Appfolio’s top-line had been impressively consistent pre-Covid, and predictively slipped throughout the pandemic.

  • FY15: 56%
  • FY16: 41%
  • FY17: 36%
  • FY18: 32%
  • FY19: 35%
  • FY20: 21%
  • FY21: 16%

But its rebound has been immense, ticking up to its consistent pre-pandemic growth rate.

  • FY22: 31%
  • FY23: 31%

What I like

Encouragingly, there may be room for further acceleration, as they just reported 39% growth in its Q4’23. Assuming a similar beat to FY24 to their fiscal guide provided last year, I predict their FY’24 revenue to grow 30% (they guided for 23%). So, ticks the box for consistent, durable growth.

The bottom-line is scaling rapidly too; FY’23 FCF margin reached 12%, up from -1% the previous year. In its more recent quarter, FCF margin stood at 20%. They’re predicting FCF margin to be 17-19% next year, so it would not be unreasonable to expect modest beats to reach mid-20%s this coming year. Ticks the boxes for rapid operating leverage.

With valuations stretching across SaaS, let’s analyze where Appfolio stands. If we take my two assumptions (revenue + FCF), assuming 30% NTM growth at a 25% FCF, Appfolio is currently priced at ~39x FCF (NTM). This seems quite reasonable, and ticks the box for reasonable valuation (a rarity in today’s environment…feels strange to say this after the last 2 years).

I also noticed that SBC is only 7% of total revenue, and dilution is kept to an absolute minimum (1.7% in the last year…4.4% in the last three years). Ticks the box for responsible management. This also strengthens the valuation case, as you could arrive at a reasonable forward P/E multiple. Notice their EPS progress the last four quarters: -$0.99 → -$0.53 → $0.74 → $0.85.

What I Dislike

The biggest issue I see, is that the “Value Added Services” segment (non-SaaS) is growing much faster (49% compared to 16% for SaaS in its latest quarter). Some of which was driven by a $2.49 ACH fee for rent payments that they introduced recently, which caused a lot of anger expressed across online forums.

Secondly, the growth of total number of property units served by Appfolio has been decreasing, though they did see an uptick this last quarter. This may be a reflection of the slower real-estate environment due to high interest rates.

  • Q1’22: 17%
  • Q2’22: 17%
  • Q3’22: 18%
  • Q4’23: 16%
  • Q1’23: 14%
  • Q2’23: 13%
  • Q3’23: 10%
  • Q4’23: 13%

Another aspect I dislike is that Appfolio doesn’t take questions during their earnings calls. That’s right, they go through the prepared remarks and end the call…

Conclusion

Appfolio has already proven to be a winning investment, with its share price at $235 after IPO’ing at $12 nearly a decade ago. It doesn’t carry the risks that we’ve seen in some mid-cap SaaS companies, where a stock can drop 20-40% if one of two metrics are missed. Its performance has diminished the claims that its niche is ‘too small’ and has room to continue growing profitably. Questions definitely remain, but I’m looking forward to getting this group’s feedback.

-RMTZP

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It sounded interesting, but then you got to they don’t take questions during conference call. That sure gave me a bad feeling too.
Saul

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RMTZP,

I use a fairly simplistic but (I hope) effective algorithm when considering whether or not to investigate a digitization play: I compare them to other digitization plays, Just off the top of my head I can come up with companies like $BILL, $PCOR, $TEAM, $GTLB, $CRM, $MNDY, $DOCU, $VEEV, $IOT, $MQ, $AXON, $NU, $MELI, $NOW
Not an exhaustive list of course, but enough to start with to illustrate.

Let’s put them into buckets:
Narrowly defined business and/or user-base: $APPF, $MQ
Business processes with medium scope: $BILL, $GTLB, $CRM, $DOCU, $VEEV, $IOT, $AXON
Extremely broad business scope and/or end-user base: $TEAM, $MNDY, $NU, $MELI, $NOW

Personally, i look at current revenue, the potential to accelerate revenue, and the potential order-of-magnitude of revenue acceleration, vs. current market cap. Pretty simplistic analysis, I know, but here’s how I assess it:

$APPF:

  • Revenue of $171M in most-recent quarter
  • Limited to Property Management
  • Not sure what their plans are to expand revenue
  • MC is $8.3B
  • P/E is 61

$MNDY
  • Revenue of $189M in most-recent quarter (…they report this coming Monday before market open)
  • UNLIMITED scope of businesses they are selling to and potential end-user-base is “anyone on the planet who uses a computer while doing their job”
  • Already expanding revenue into adjacencies like CRM, code-revision-control, integrations with external systems etc,
  • MC is 11.3B
  • P/E is 153

So I can buy $APPF and its future potential for $8.3B, or I can buy $MNDY and its future potential for 11.3B

It’s not a full-blown analysis; it’s just the process I use to determine if I want to investigate further. Based on this process I’d say I’m most likely to stick with my current choice ($MNDY) unless/until I see additional strong evidence in support of $APPF.

Granted, $APPF has done a good job of growing revenue in the past; however, I’d need to know more about their plans to expand revenue in the future.

My apologies if that’s too simplistic, but that’s how I assess this anyway.

In any case, thank you for proposing a company! I do appreciate it!

–intjudo
Long $MNDY, 5%-ish

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