There's no nice way to say it. The last two years have been brutal for the software sector. Software-as-a-service stocks were among the biggest winners from the 2010s through the pandemic, but since the Nasdaq Composite peak in November 2021, cloud software stocks have plunged, and many of them struggled to recover even as big tech stocks rallied this year.
Among the losers has been Appian (NASDAQ: APPN), the provider of low-code automation software. The stock surged briefly in 2020 and 2021 on a short squeeze and hopes that its low-code software would see a boom during the pandemic. However, it gave up much of those gains in 2021 and struggled to recover since then. This year, the stock is up 23%, but it's still down 83% from the peak in 2021.
Along that journey, Appian, which helps enterprises automate their workflows, continued to deliver solid growth in its core cloud subscription business, but profits remain elusive.
Image source: Getty Images.
Appian did make progress on the bottom line in its third-quarter earnings report, and topped estimates. Cloud subscription revenue grew 27% year over year to $77.2 million, and overall revenue was up 16% year over year to $137.1 million, ahead of the analyst consensus of $135.3 million. On the bottom line, the company also achieved its own goal of bringing its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss margins to less than 10% of revenue, as it reported an adjusted EBITDA loss of $5.3 million. However, management cautioned that the EBITDA loss was narrower than expected due to some employee-related expenses shifting to the fourth quarter. As a result, the company sees its adjusted EBITDA loss widening to $12.1 million to $16.1 million in the fourth quarter.
Appian is still focused on reaching positive adjusted EBITDA, though it did note continued macro headwinds, which seem likely to delay profitability. Management also said it could be vulnerable to a government shutdown, as the federal government is one of its biggest customer verticals.
Appian's AI strategy
Demand for artificial intelligence (AI) is powering a new growth phase for the tech world, and Appian, which has long used AI tools like machine learning as part of its low-code automation, is targeting new growth from private AI. CEO Matt Calkins said on the earnings call, "I don't believe that most customers will allow their data to be sent over the internet to a public AI service, nor do I think they wish to train an AI algorithm they do not own."
When I interviewed him recently, Calkins said that the company works with a variety of large language models including ChatGPT and Meta Platforms' LLaMa in a private cloud to help its customers get the answers they need using direct, natural language and to design interfaces and online tools to make data easily accessible and make it easier to design and create workflows. Appian also offers its own AI copilot to assist developers on its platform, helping to deploy new workflows and make changes.
Appian is in the process of deploying these new tools as part of its AI product suite, and Calkins sees 2024 as a critical year in AI development when the technology goes from talk to action. He said Appian would be an innovation leader, adding that the company was "ahead of the market in terms of the value we can create with AI ... private AI is way ahead." He also said the next five years could see a real tech boom as "a lot of prior investments become realized" both within Appian and in the broader tech sector.
What it means for Appian stock
Appian's guidance is historically conservative, and its fourth-quarter expectations aren't going to excite many investors, as it sees overall revenue growth slowing to 10%-14% in the fourth quarter. That's part of the reason the stock sold off on Friday.
While the macro environment remains a risk, the emergence of its private AI platform could be a significant driver for the company in the coming years. Appian, with its focus on private AI, could be a winner, especially as the stock is trading at a relatively low valuation. If revenue growth accelerates and it builds demand for its AI services, the stock could have a lot of room to run.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Meta Platforms. The Motley Fool has positions in and recommends Appian and Meta Platforms. The Motley Fool has a disclosure policy.
