AI-Powered Automation Will Improve Customer Value And Expand Federal Opportunities

Key Takeaways

• Integrating AI into workflows and introducing tiered pricing could enhance customer value and drive increased revenue and retention.
  
• Federal market expansion and upselling existing customers present avenues for significant earnings growth and improved efficiency.
  
• Uncertainty in U.S. Federal spending and reliance on on-premise sales over cloud subscriptions could impact Appian's future revenue growth and predictability.

Catalysts

Operates as a software company in the United States, Australia, Canada, France, Germany, India, Italy, Japan, Mexico, the Netherlands, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and internationally.

• Appian's integration of AI into workflows could significantly enhance customer value by streamlining high-volume tasks, potentially driving increased subscription revenue and higher customer retention.
  
• The new tiered pricing structure, particularly for advanced AI functionality, offers an opportunity to monetize existing customers more effectively, positively impacting revenue growth.
  
• Appian's emphasis on process automation with AI could double the value of their technology offering, potentially leading to higher net margins as AI-driven efficiencies take effect in customer processes.
  
• Expansion within federal government markets and increased efficiency needs in this sector could lead to significant new revenue opportunities, improving overall earnings potential.
  
• Upselling existing customers and new use cases, as seen with key customer upgrades, suggests potential for robust earnings growth from a larger software base and higher-tier product adoption.

Appian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Appian's revenue will grow by 9.1% annually over the next 3 years.
• Analysts are not forecasting that Appian will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Appian's profit margin will increase from -9.6% to the average US Software industry of 13.2% in 3 years.
• If Appian's profit margin were to converge on the industry average, you could expect earnings to reach $108.9 million (and earnings per share of $1.36) by about July 2028, up from $-60.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.7x on those 2028 earnings, up from -35.9x today. This future PE is lower than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to grow by 2.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Appian Future Earnings Per Share Growth

Risks

• The company is cautious about the potential impact of changes and uncertainty in U.S. Federal spending, particularly regarding the Department of Defense (DoD), which could affect future revenue and earnings.
  
• The decrease in cloud subscription revenue retention rate from 119% to 116% may indicate challenges in retaining or upselling to existing customers, potentially impacting future revenue growth.
  
• A significant portion of Appian's growth in the recent quarter came from on-premise sales rather than cloud subscriptions, which the company does not expect to continue at the same level and could affect future revenue predictability and margins.
  
• The pricing and monetization of newly introduced AI functionalities and agents are still evolving, and the company is subsidizing usage, which could impact short-term revenue and profitability.
  
• The professional services revenue was relatively flat and may continue to decline as a percentage of total revenue, indicating potential challenges in leveraging services to drive broader business growth and profitability.

Valuation

• The analysts have a consensus price target of $35.0 for Appian based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $41.0, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $822.4 million, earnings will come to $108.9 million, and it would be trading on a PE ratio of 32.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of $29.24, the analyst price target of $35.0 is 16.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.