I love investing in Software as a Service (SaaS) shares. Even bigger is my preference for small or medium-sized businesses, most of which have never heard of. AppFolio (WKN: A14TU7), the cloud software company for small and medium-sized property managers and law firms, meets both criteria.
Here are five reasons why investors should get to know this company, which is flying many under the radar.
Year-over-Year Sales Growth Above 30% The first question that many investors should ask when looking at a new company is that of revenue growth. Growth investors want growth rates above average (sales growth is in the low single digits). AppFolio’s history should please most investors:
Key figures 2016 2017 2018 Q1 2019 Q2 2019 Revenues $ 105.6 million $ 143.8 million $ 190.1 million $ 57.1 million $ 63.6 million Revenue growth 40.8% 36.2% 32, 2% 34.8% 34.7%
Most of the revenue comes from Core Solutions (platform subscription fees) and Value Plus Services. This includes transaction fees from payments, tenant screenings or insurance services. Value Plus Services generated 61.5% of revenue in the last quarter and Core Solutions stood at 34%.
Focus on a Big Market Aside from healthy sales, growth investors value companies that have a large addressable market ahead of them. AppFolio’s platform also fulfills this criterion. With over 90% of revenues coming from software and services for the property management industry, this market is the most important one. The addressable market is expected to be at least $ 5 billion in the US alone. The market penetration of the company is thus in the low single-digit percentage range. For the legal industry, the company’s addressable market is at least $ 2 billion, with a market share below 10%.
In addition, the AppFolio system could be extended to small and medium-sized enterprises in other industries, thereby increasing the market potential.
Innovations for its customers Large markets attract competition. To sustain their growth, software companies are forced to constantly improve their products. AppFolio has a long history of investing in product enhancements since it first launched the AppFolio Property Manager in 2008. Over the years, features such as marketing, tenant screening, insurance, and more have been added to turn the platform into holistic building management software.
Some improvements were announced at the last analysts’ conference, such as new public utility and property management functions, and the management of larger building complexes. While the company does not disclose its churn rate or contract renewals, the customer base continued to increase quarter on quarter and reported revenue growth could not be matched by falling customer numbers. The company’s constant drive for innovation helps it to attract and retain customers.
Robust Finance Help Finance Innovation and Acquisitions A business can own great products and be innovative, but if it burns cash and / or is unprofitable, investors could stay away from the business. This is not the case with this SaaS company because it has outstanding finances. In the last quarter, a strong 60.5% gross margin gave the company the opportunity to increase its research and development spend, which was 14.7% of revenue. That’s on a par with SaaS giant Salesforce (NYSE:) .com, which spends 15.1% of its R & D revenue. Despite this high spending, the operating margin was 3.6%, making the company perfect for the tenth consecutive profitable quarter. AppFolio also has the Rule-of-40 test, which adds sales growth and profit margin to a SaaS company.
The balance sheet was largely debt-free until management raised $ 50 million in the fourth quarter of 2018 for the January 2019 acquisition of Dynasty Marketplace, an AI company. At the analysts’ conference, management was able to report that Dynasty’s AI product has been integrated into the building management platform to help the largest and most complex customers. The revenues from this feature will be reflected in the value-plus segment in future quarters. Investors should not worry about this debt, as the balance sheet with $ 38.9 million in cash and short-term investments is solid and cash flow positive.
The management thinks long term An analysis of this company would not be complete if we did not look at the management yet. Chief strategist Klaus Schauser and CTO Jon Walker are the co-founders of the company, which was founded in 2006, and is still involved in day-to-day business. Chairman and CEO Jason Randall has also been involved for a long time: He joined the company in 2008, where he was responsible for software development of the then recently launched property management product, and remained in that position for six years before assuming higher offices and assuming his current role in 2017. These three executives together own 19.8% of the company’s stock, which is not insignificant. Investors can sleep soundly knowing that management is also invested, has a deep understanding of the platform, and has a long-term focus on all of its decisions.
And… one more thing…
This niche-focused SaaS company has some big pluses, but resourceful investors should know one more thing: Wall Street has yet to spot this stock, with only two analysts tracking the company (compared to the 26th) that cover Shopify). It might be a good idea to add this hidden gem to your portfolio before the broader market moves on.
Brian Withers owns shares of AppFolio and Shopify. The Motley Fool owns and recommends shares of AppFolio, Salesforce.com and Shopify. The Motley Fool has the following options: Long January 2021 $ 100 Calls on Salesforce.com.
This article was published on Fool.com on October 3, 1919 and has been translated for our German readers.
Also published on Medium.