share of Appian (Appn 2.17%) Compressing valuations in the software sector cut the low-code software specialist in half last year even as it continued to post solid growth.
According to data from S&P Global Market IntelligenceStocks end 2022 down 50%.
As you can see from the chart below, Appian shares have declined steadily over the course of the year, reflecting a broader decline in the software-as-a-service (SaaS) sector.
Investors turned away from the SaaS sector last year as inflated valuations and rising interest rates made for a toxic combination as many of these stocks, including Appian, are unprofitable. In a high interest rate environment, investors tend to shift their money into bonds or safer, income-producing sectors such as consumer staples stocks.
As you can see from the chart above, Appian stock has been volatile over the years even though it has been on a downward trend. There weren’t any dominant details other than a broad sell-off in software stocks, but its latest earnings report provided some important insights, and the stock has fallen by about a third since it was released.
The stock fell 19% the day after the report was released as the company’s guidance called for cloud subscription revenue growth to slow between 24% and 26% in the fourth quarter. Historically, its cloud growth has been in the 30% range. Appian is also not profitable, and his combination Earnings before interest, taxes, depreciation, and amortization (EBITDA) loss widened to $22.9 million from $12 million in the third quarter. That’s because the company hit its hiring goals faster than expected, but it still shows the company is losing money at a time when investors have come to value profitability over growth, CEO Matt Calkins said.
Calkins said on the earnings call that the company plans to halve adjusted EBITDA losses as a percentage of revenue next year to 10% of revenue in the second half of 2023.
Appian rates high in the low-code software space, and its total renewal rate tends to be around 99%, which shows that customers are highly satisfied with the product.
However, sluggish revenue growth and continued losses are a problem for the stock, especially in an environment where investors believe SaaS stocks are overvalued.
The company has the ability to turn around its performance, but it needs to accelerate revenue growth or take significant steps toward profitability.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool contains verses and recommends Appian. Motley Fool has a revealing policy.