AppFolio: Ripe for a Dip (APPF)

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Property managers turn to AppFolio’s (NASDAQ: APPF) cloud-based property management platform to perform their work remotely while allowing them to stay in close contact with the rest of their team members and their client community. The APPF sold its MyCase’s legal activity dates back to September 2020 and is now a pure-player in the field of property management and real estate investment management.

The stock is down 38% since my August 2020 bearish article (see APPF: significantly overvalued and ripe for a correction) but still sports a forward P/E of 265x. After reviewing its latest EPS report, I’m still bearish on the company’s current valuation level. AppFolio is expected to release its FY22 first quarter results next week – after market close on Monday, May 9. Given the current macro investing environment, I suspect the market will be disappointed with the results and the stock will continue to decline.

Investment thesis

AppFolio runs a cloud-based property management platform that helps property managers with communication and services, accounting, maintenance and operations, staffing, marketing and lease. The company also offers a real estate investment management offering that helps real estate investors track and grow their real estate holdings. Basically, the APPF leverages a SaaS-based business model to help property managers digitally transform their business. APPF is a leading provider of these property management services, and by the end of 2021 had over 17,000 customers in the United States.

APPF was founded in 2006 and is based in Santa Barbara, California. Let’s take a closer look at the results for fiscal year 2021 and see how the company fared last year.

Earnings

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

AppFolio FY2021 Revenue Report

AppFolio

As mentioned earlier, the annual results are not an apples-to-apples comparison due to the APPF divesting the MyCase legal business in September 2020. That being so, I will focus on the fourth quarter annual comparisons.

As the chart shows, fourth quarter revenue of $95.6 million was up nicely (+32% YoY). However, note that total costs and operating expenses increased even more (37%) and exceeded revenues by $7.3 million. The end result was a net loss of $0.04/share.

My observation is that the APPF has been in business since 2006 and one of the benefits of a SaaS-based cloud software business model is that it is expected to scale very profitably. However, the APPF does not seem able to do so. Revenue growth is strong, but so are operating expenses – and they are increasing across the board: sales and marketing, R&D and G&A – all increased significantly. The number of employees also continues to grow significantly, with 1,600 employees at the end of 2021 compared to 1,335 at the end of 2021 (+20%).

Total cash and short-term investments at the end of 2021 was $122.4 million, down $46.1 million year-over-year.

Meanwhile, fourth quarter stock-based compensation more than doubled year-over-year and for all of 2021, it totaled $15.3 million:

APPF Q4 Stock-based compensation

AppFolio

Evaluation

The APPF’s orientations for the 2021 financial year are as follows:

  • Annual revenue is expected to be between $447 million and $457 million.
  • Diluted weighted average shares are expected to be around 36.5 million.

Mid-range revenue forecast ($452 million) infers 18.2% growth from FY21 fourth quarter annualized revenue of $95.6 million, or $382.4 million of dollars. This would obviously be a deceleration in year-over-year revenue growth seen in the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020.

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

FPAP evaluation parameters

Looking for Alpha

Further, suppose that, as if by magic, the APPF was able to reach 25% report FY22 revenue margin estimated at $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 stock price of $104, this 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 business scaling.

However, as mentioned earlier, revenue growth looks set to slow significantly this year and APPF operating expenses do not appear to be slowing down at all, quite the contrary. In other words, the assumption of a 25% net margin this year seems like a pipe dream in my opinion given that the APPF’s SaaS platform does not seem to be scaling effectively.

Risks

On the positive side, the APPF has no long-term debt and, as previously mentioned, at the end of 2021, it had $122.4 million in cash and cash equivalents – or approximately 3 $.52/share. The company’s balance sheet is therefore solid.

However, and as mentioned earlier, the company burned through $46.1 million in cash last year. That said, the APPF’s forecast for the number of year-end shares indicates that the number of shares will only increase by about 1.5 million this year (mostly employee incentive shares). That said, there should be relatively minimal dilution in the number of shares in FY22.

Seeking Alpha is currently earning a short-term interest in APPF of 5.15%. That’s down significantly from the 9.15% short position in the stock when I started covering the company in August 2020.

To date, APPF has focused on the US market. However, there’s no reason why its cloud-based platform can’t be expanded to Europe and other global markets, offering increased growth potential. However, as previously reported, it looks like revenue growth for FY22 will slow significantly compared to FY21.

Summary and conclusion

APPF operates an attractive SaaS-based business model to help property managers and property investors. While revenue growth has been relatively strong, so has 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 the cost-effectiveness of its scalability. Yet the APPF’s spending is increasing across all of its operations (sales and marketing, R&D and G&A) and staff growth is still important in my view. Bottom line: I think APPF shares need to keep falling, and given the current market environment, they could easily drop another 20% (or more).

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

APPF 5-Year Stock Chart

Y-Charts