- By GF Value
The stock of Appian (NAS:APPN, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $97.57 per share and the market cap of $6.9 billion, Appian stock shows every sign of being significantly overvalued. GF Value for Appian is shown in the chart below.
Because Appian is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.3% over the past five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Appian has a cash-to-debt ratio of 3.83, which is in the middle range of the companies in Software industry. The overall financial strength of Appian is 6 out of 10, which indicates that the financial strength of Appian is fair. This is the debt and cash of Appian over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Appian has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $304.6 million and loss of $0.48 a share. Its operating margin is -12.44%, which ranks worse than 73% of the companies in Software industry. Overall, GuruFocus ranks the profitability of Appian at 2 out of 10, which indicates poor profitability. This is the revenue and net income of Appian over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Appian is 7.3%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth is 13.3%, which ranks in the middle range of the companies in Software industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Appian's ROIC is -17.07 while its WACC came in at 11.85. The historical ROIC vs WACC comparison of Appian is shown below:
To conclude, The stock of Appian (NAS:APPN, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks in the middle range of the companies in Software industry. To learn more about Appian stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.