AppFolio: Growth Outlook Remains Steady

seekingalpha10-27

I maintain a buy rating for AppFolio due to its strong growth potential and favorable macroeconomic conditions supporting new home demand.AppFolio reported 24% y/y revenue growth in the latest quarter...

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Gary Yeowell Summary I gave a buy rating to AppFolio (NASDAQ:APPF) in July, with my key thesis being that there is a long runway of growth ahead, and APPF can continue to capture demand because of the strong value proposition it offers to property managers. The macro environment was also in favor of APPF previously. APPF continues to deserve a buy rating from me, as I don’t see any reason for the business to not grow at mid-20% in the foreseeable future. The macro situation continues to be positive for APPF, and the new products should further enhance APPF’s ability to capture demand. Earnings results update In the latest quarter (3Q24) reported a few days ago, APPF grew total revenue by 24% y/y to $206 million, which represented a step-down from the 34% y/y growth seen in 2Q24. Driving the growth were core solutions (16% y/y growth) and value-added services (28% y/y growth), coming in at $46 million and $158 million, respectively. Total customer count grew by 5% y/y to 20.4k while units served grew by 9% y/y. This translates to revenue per unit growth of 18% y/y and per customer of 19% y/y. Shifting attention down the income statement, gross margin sustained at 66% vs. 65% in 2Q24, leading to a gross profit of $135 million. The business saw strong operating leverage as both adj EBIT and adj EBITDA margin expanded by 13 pts and 11 pts, respectively. Demand set to inflect upwards Although total revenue growth decelerated sharply sequentially and is very likely the cause of the share price decline, I remain confident that APPF can sustain mid-20% y/y growth for the foreseeable future. Bloomberg There are two things to consider here. One is the macro situation, which remains in a sweet spot that heavily favors new home demand—every new home is a new opportunity to be managed. The key driver for this tailwind is the Fed’s decision to cut rates in September, which drove a surge in demand for new homes. The pushback by the bears here is that mortgage rates actually went up after the rate cut, so this should pressure new home sales in the near term. That is a fair assessment, but I think the focus should be that any decline in mortgage rates drives a surge in demand. The question is whether mortgage rates will come down. I think the answer is yes, as the Fed has signaled their intention to do so. There may be some lag before mortgage rates follow the same direction as the Fed rate, but eventually they do. The current expectation is for a 1 percent cut in FY25, so that will put the fed rate in the range of ~4%, which means mortgage rates are going to be in the ~5% range (assume the same 1 percent reduction). The reason this is a sweet spot for APPF is because, as I mentioned previously, between the current 6% mortgage rates and the 4% hurdle, consumers are likely to purchase new homes. In the near term, because of the high mortgage rate environment, the cost of buying properties is relatively high compared to renting, and this should drive more activity in the rental market. This aside, the high mortgage environment has also driven huge demand for new homes, as existing home owners are reluctant to list their homes for sale (if they do, they need to refinance at a higher rate). Considering that the majority of current homeowners have their mortgage rates set below 4%, there is a long way before this group of homeowners is incentivized to refinance their mortgage. This puts a lot of demand pressure on new homes (as can be seen from the chart above). This is great for APPF because every new home is a potential unit to be managed The second thing to note here is that APPF product has gotten a lot better, which should enable it to better capture growth opportunities. In the 3Q24 quarter, APPF acquired LiveEasy (a home and moving service concierge platform) and is going to integrate it into its FolioSpace product. This is a very positive strategic move, in my opinion, as it helps APPF to capture more of tenant’s wallet share. For those that are unaware, FolioSpace is a platform that helps property managers to better manage their end tenants' rental lifecycle, from application to communication with managers, to utilities set up, to renewal. As such, naturally, part of a rental lifecycle is moving between homes. It was also noted during the call that APPF is going to release more products next week. Some of the product highlights I think are worth mentioning are:  The Realm-X Assistant and Messages to all customers and Realm-X Flows to customers on both its Plus and Max tiers. These are solid product enhancements, in my view, as they leverage AI capabilities to allow customers to automate processes and streamline workflows—in other words, a whole load of productivity improvements. The early results from beta customers were very promising, where management cited weekly savings of 10 hours when it comes to completing tasks. The budgeting tool (now in beta launch) for Plus and Max customers to aid in expansion upmarket. This should be well received by customers as it helps improve revenue yield as the tool allows customers to enter and change assumptions on future leasing metrics, and they get to see real-time revenue results. The new interface for the bill approval process which should help improve payable cycles as users can design approval workflows that run automatically subject to input conditions.  Valuation   Source: Author's calculation There aren’t any changes to the way I model APPF. The results and developments in 3Q24 simply proved that APPF can continue to sustain this mid-20% growth for the foreseeable future. My view regarding the multiple that APPF should trade at remains the same too (refer to below). What has changed is the potential upside as the stock has derated in the recent months, which, I think, is not due to structural reasons. As long as APPF can continue to print mid-20% growth with expanding margins, we should see solid share price appreciation from here. I used forward revenue multiple because it is easier to compare to the APPF historical trading range. I believe APPF should trade at 10x forward revenue, which is its 10-year average, despite the slower growth head (which previously was >30%) because the business is a lot more profitable today than in the past. The improved profitability should more than balance out the slower growth... (note: APPF traded at as much as 16x forward revenue in FY20). That said, given the difference in interest rates today, it is very unlikely that the market will value at 16x again, but we don’t need that to happen anyway. (At 10x, the upside is good enough.). Investment Risk The sudden departure of the CFO may be a red flag, as there was no prior indication of this happening. If there are more of such cases, it may imply a weak management team that is not going to sit well with investors. Given the time needed to reap the synergies from the LiveEasy acquisition (addition of 65 members) and for the sales reps to become mature in terms of productivity. Conclusion  My positive view on APPF is because the growth story remains intact. The favorable macroeconomic environment, coupled with the strategic product enhancements, should position APPF to continue capturing market share and delivering mid-20% growth. Despite the recent share price decline, the underlying fundamentals remain strong, as such, I reiterate my buy rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2478135101"}