Thursday, October 8, 2020

A Small Cap Equity holding: AppFolio Inc. (APPF, $154.34): “Get that Saas Under Control” by: By: Haley Gaffner, AIM Student at Marquette University

 AppFolio Inc. (APPF, $154.34): “Get that Saas Under Control”

By: Haley Gaffner, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• AppFolio Inc. (NASDAQ: APPF) provides SaaS cloud-based software solutions, services, and data analytics for small to mid-sized property management businesses.


• APPF grew their customer base and units managed substantially YoY

• APPF has maintained double digit growth, 27%, through the first half of 2020 amidst a pandemic. 

• APPF surprised the street with their Q2 EPS of $0.54. 

• APPF announced in September that the company will be selling subsidiary, My Case.

Key points: AppFolio remains a competitive player and leader in the Saas space. The company operates in a niche subsector that brings Saas software into the REIT sector. The company has grown substantially since 2019 Q2. APPF grew from 13,737 customers and 4.23 million units under management to an estimated 15,000 customers and 4.9 million units under management.

Surprisingly, APPF weathered the global pandemic well. While the company has produced an impressive 5-year revenue CAGR of 37%, the growth through the first half of the year still remains impressive with 27% growth. The trailing twelve-month gross margin expanded to 62.5% compared to 55% when the company IPOed just over five years ago. 

APPF surprised the street with their Q2 earnings, announced June 30th, 2020, coming in at $0.54 GAAP. The street was thinking earnings may look more like $0.12. This gave the stock a bump and restored moral in shareholders. Investors have been skeptical as it trades at 17x sales which is not cheap. However, earnings have been positively surprising the street for the past five quarters.

APPF announced in early September that the company will be selling subsidiary, My Case, to Apax partners. My Case is estimated to be sold for $193 million cash. My Case offers Saas software solutions to lawyers that help manage their cases. My Case solution make up roughly 10% of APPF’s revenue. The company is pivoting slightly to solely focus on REIT software as that is where their demand is. APPF has ramped up R&D spending from 12% - 15% of sales to expand their primary solutions.

What has the stock done lately?

When the company announced the selling of subsidiary, My Case, the stock dropped just over 10%, but has since been rebounding. The 10% drop could partially account for the correction the technology sector saw that same week. Although APPF was hit hard mid- February when Covid-19 hit the United States, where 100% of the firm’s revenue comes from, the price has rallied. 

Past Year Performance: APPF has an eye-catching return of 60% for the year, coming in at nearly 55% over the benchmark. Although the company has experienced much volatility in the past year due largely to geopolitical events, investors who have held this company long-term have been rewarded. The company has not missed earnings in five quarters reflecting positively in the price every time. APPF managed to bring their short interest down nearly 3%, from 11.53% to 7.83% giving investors peace of mind.

1 Year APPF Performance      


Source: FactSet

My Takeaway

APPF has offered investors an attractive return for the year and weathered the global pandemic better than competitors such as RealPage. The company selling subsidiary, My Case, concerned investors at first. However, I think that this could be a good move for the company to contrate capital in the business line that has been growing at nearly a 40% CAGR. APPF is a bit on the expensive side, trading at 17x sales, but I think that the company has more runway to grow. I think within the next two years, we will see top line growth trickle in and expand EBIT margins from 10% to roughly 14%. APPF was pitched in mid-January at just over $120 and is now at $154 with a price target of $180. Given this company’s past year performance, improved ratios, and constant growth, I believe APPF should continue to be held in the AIM small cap equity portfolio.

1 Month APPF Performance

Source: FactSet