What happened
Shares of Appian (APPN -0.66%) got chopped in half last year as compressing valuations in the software sector dinged the low-code software specialist even as it continued to post solid growth.
According to data from S&P Global Market Intelligence, the stock finished 2022 down 50%.
As you can see from the chart below, Appian shares declined steadily over the course of the year, mirroring a broader decline in the software-as-a-service (SaaS) sector.
So what
Investors turned away from the SaaS sector last year as bloated valuations and rising interest rates made for a toxic combination as many of these stocks, including Appian, are unprofitable. In high interest rate environments, investors tend to shift their money to bonds or safer, income-producing segments like consumer staples stocks.
As you can see from the chart above, Appian stock was volatile over the course of the year even as it was in a downward trend. There was no dominant narrative other than the broader sell-off in software stocks, but its most recent earnings report offers some important insights, and the stock is down about a third since it came out.
The stock fell 19% the day after the report came out as the company's guidance called for cloud subscription revenue growth to slow to between 24% and 26% in the fourth quarter. Historically, its cloud growth has been in the 30% range. Appian is also not profitable, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss widened from $12 million to $22.9 million in the third quarter. CEO Matt Calkins said that was because the company reached its hiring target faster than it expected to, but it nonetheless showed the company continuing to lose money at a time when investors have come to value profitability over growth.
Calkins said on the earnings call that the company plans to reduce the adjusted EBITDA loss by half as a percentage of revenue over the next year, bringing it to 10% of revenue by the second half of 2023.
Now what
Appian rates highly in the low-code software space, and its gross renewals tend to be around 99%, showing customers are overwhelmingly satisfied with the product.
However, the slowing revenue growth and continuing losses are a problem for the stock, especially in an environment where investors believe SaaS stocks are overvalued.
The company has the ability to turn around its performance, but it will need to reaccelerate its revenue growth or take significant steps toward profitability.
