AppFolio: Ripe For A Plunge (APPF)

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Estate Agent Showing Prospective Buyers Around Property

Prostock-Studio/iStock via Getty Images

Property managers turn to AppFolio’s (NASDAQ:APPF) cloud-based property management platform to get their work done remotely while also enabling them to keep in close contact with the rest of their team members and their customer’s community. APPF sold its MyCase legal business back in September of 2020 and is now a pure-play in the property management and real estate investment management business.

The stock is down 38% since my bearish article in August of 2020 (see APPF: Significantly Overvalued & Ripe For A Correction) yet still sports a forward P/E of 265x. After reviewing its most recent EPS report, I am still bearish on the company’s current valuation level. AppFolio is due to report Q1 FY22 earnings next week – after the market closes on Monday, May 9th. Given the current macro investment environment, my guess is the market will be underwhelmed by the results and the stock will continue lower.

Investment Thesis

AppFolio runs a cloud-based property management platform that helps property managers with communication & services, accounting, maintenance and operations, staffing, marketing, and leasing. The company also has a real estate investment management offering that helps real estate investors keep track of, and grow, their real estate holdings. Basically, APPF is operating a SaaS-based business model to help real estate property managers digitally transform their business. APPF is a leading provider of these property management services, and as of year-end 2021 reported it had 17,000+ customers throughout the United States.

APPF was founded in 2006 and is headquartered in Santa Barbara, California. Let’s take a closer look at FY2021 results and see how the company performed last year.

Earnings

On February 28th, AppFolio released its Q4 and full-year 2021 EPS report and the consolidated statement is shown below:

AppFolio FY2021 Earnings Report

AppFolio

As mentioned previously, YoY results are not an apples-to-apples comparison due to the fact that APPF divested the MyCase legal business in September of 2020. That being the case, I will focus on Q4 YoY comparisons.

As can be seen in the graphic, Q4 revenue of $95.6 million was up nicely (+32% YoY). However, note that total costs and operating expenses were up even more (37%) and exceeded revenue by $7.3 million. The end result was a net loss of $0.04/share.

My observation is that APPF has been in business since 2006 and one of the advantages of a SaaS-based cloud software business model is that it is supposed to scale up in a very cost-efficient manner. Yet APPF doesn’t appear to be able to do that. Revenue growth is strong, but so are operating expenses – and they are growing across the board: sales & marketing, R&D, and G&A – all were up significantly. Employee count is still growing significantly as well, with 1,600 employees at year-end 2021 as compared to 1,335 at year-end 2021 (+20%).

Total cash and short-term investments at year-end 2021 was $122.4 million, down by $46.1 million YoY.

Meantime, Q4 stock-based compensation more than doubled YoY and for full-year 2021 totaled $15.3 million:

APPF Q4 Stock Based Compensation

AppFolio

Valuation

APPF’s guidance for FY2021 is as follows:

  • Full-year revenue is expected to be in the range of $447 to $457 million.
  • Diluted weighted average shares are expected to be ~36.5 million.

The mid-range of the revenue guidance ($452 million) infers 18.2% growth as compared to annualized Q4 FY21 revenue of $95.6 million, or $382.4 million. That would obviously be a deceleration of the YoY revenue growth seen in Q4 FY2021 versus Q4 FY2020.

Still, APPF trades at a very lofty forward P/E of 265x. Indeed, virtually every valuation metric for APPF tracked by Seeking Alpha is D or F rated, including a whopping 12.2x price-to-book multiple:

APPF Valuation Metrics

Seeking Alpha

Further, let’s assume that, magically, APPF was able to attain 25% net margin on FY22 revenue of an estimated $452 million. That would equate to $113 million in net income. Based on current expectations for a year-end share count of 36.5 million fully diluted shares, that would mean EPS of $3.09/share. With a current share price of $104, that would equate to a P/E = 33.7x. That would be a relatively rational valuation level for a SaaS-based platform showing strong revenue growth and efficient scaling up of the business.

However, as mentioned earlier, revenue growth appears poised to significantly decelerate this year and APPF’s operating expenses don’t appear to be slowing at all – just the opposite. That is, the assumption of 25% net margin this year appears to be a pipe-dream in my opinion given the fact that APPF’s SaaS-based platform doesn’t appear to be scaling up in an efficient manner.

Risks

On the plus side, APPF has no long-term debt and, as mentioned earlier, at year-end 2021 had $122.4 million in cash & cash equivalents – or an estimated $3.52/share. So the company’s balance sheet is strong.

However, and as also mentioned earlier, the company burned $46.1 million in cash last year. That said, APPF’s guidance for the year-end share count indicates the share count will only increase by ~1.5 million this year (mostly employee stock incentives). That being the case, there should be relatively minimal share count dilution in FY22.

Seeking Alpha currently reports short interest in APPF is 5.15%. That is down significantly from the 9.15% short position in the stock when I initiated coverage on the company in August of 2020.

To date, APPF has been concentrating on the US market. However, there is no reason its cloud-based platform could not be extended to Europe and other global markets – providing increased growth potential. However, as noted previously, it would appear revenue growth for FY22 will slow significantly as compared to FY21.

Summary and Conclusion

APPF operates an interesting SaaS-based business model to help property managers and real estate investors. While revenue growth has been relatively strong, so have the company’s operating expenses – which is not what an investor wants to see. After all, the beauty of a SaaS-based model is supposed to be how cost efficiently it can scale up. Yet APPF’s expenses are growing across its operations (sales & marketing, R&D, and G&A) and headcount growth is still significant in my opinion. Bottom line: I think APPF stock has further to go on the downside, and – given the current market environment – could easily drop another 20% (or more).

I’ll end with a 5-year price chart of APPF stock:

APPF 5-year Stock Chart

YCharts



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