Appian had a successful IPO today, pricing at the middle of the initial $11-13 range and ending at $15/share, good for a 25% "pop", a solid outcome. In this post I'll use my two favorite charts to show how Appian measures up to other software companies, then discuss possible reasons why it now trades at a valuation premium to what a purely financial metrics driven approach would suggest.
First, let's look at growth efficiency. As a reminder, this chart features gross profit growth on the y axis and free cash flow margin on the x axis. All else equal, it is better to be up and to the right (high growth/high margins) but given how SaaS economics work there is a solid correlation here:
Appian grew gross profit by 32% in 2016, while posting a -7% FCF margin. On the surface, this is less efficient than many other SaaS companies (consider that Mulesoft grew almost 80% Y/y in 2016 with a slightly better margin profile). However there are good reasons to wonder if this is the whole story, as the company has recent surged its spending in sales & marketing to 44% of revenue in Q1 from just 31% in Q1 of last year. It is quite plausible that this depressed near term free cash flow margins and has yet to manifest itself in faster gross profit growth, which will move the company upward and closer to comps like New Relic, Blackline and Q2 Ebanking.
Next, let's look at valuation after today's pop. As a reminder, this chart features EV/Gross Profit (my preferred valuation metric) on the x axis and 2016 gross profit growth + 2016 free cash flow margin on the y axis. So essentially we are collapsing the two axes from the plot about into one variable, then plotting that against a valuation multiple. All else equal, it is better to be down and to the right- a low multiple but a strong combination of free cash flow and growth. Unfortunately markets are quite efficient and if companies end up far from the line there is often a great reason why.
Here, Appian sits just above the line, trading at approximately the same EV/Gross Profit multiple as Saleforce, with an inferior combination of growth/profitability. This isn't unprecedented- other recent IPOs like BlackLine (BL) and Cloudera (CLDR) also trade at premiums to the group. The other companies at such a premium tend to be vertical focused (BLKB, GWRE, VEEV) or very high growth (SHOP, MULE). Neither of those is the case for Appian, but I have some theories as to why.
Four possible reasons for a premium valuation:
There are some good reasons by Appian may be trading at a slight valuation premium on paper:
1) As discussed previously, the investments in sales and marketing in the last year may be yet to fully pay off in higher growth.
2) Peer and best public comp Pegasystems has doubled in the last year, as more and more companies look to reinvent themselves with application development platforms.
3) The company has a remarkable culture, summed up in part by this quote from CEO, Matt Calkins:
I highly recommend reading the full letter from the S-1, it is an inspiring ethos.
4) Finally, Appian is targeting an enormous addressable market as an open-ended, low code app-development platform for enterprises. There is no reason to think the company can't continue to grow at a fast pace for the next decade if it executes well.
Another successful tech IPO is a great thing to see and benchmarking aside it is important to remember how impressive this accomplishment is. Appian has taken relatively limited outside investment and IPOed at a market cap just under $1bn- Matt and the whole team have a tremendous amount to be proud of.