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Ride the Small-Cap Melt-Up with AppFolio Stock

Louis Navellier

AppFolio (NASDAQ:APPF) stock has built a niche as a cloud services and software systems provider for small and medium-sized businesses in the real estate and legal sectors.

The Intriguing Story and Questionable Valuation Behind AppFolio Stock

Source: Citrix Online via Flickr

This is a very big market, and up until now, it has been underserved by tech providers that offer powerful tools that their big competitors have access to.

But the age of scale is becoming an old concept. Technology tends to automate services, freeing personnel up to do other, higher-function jobs. This tends to benefit larger companies, since they can do more with less people, adding to their margins.

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On the smaller scale, however, most companies are already leveraged, and it’s more about finding new ways to compete in a crowded market, especially with larger, more tech-powered competition.

That’s the first phase, when tech is a tool of the big guy. Maybe it’s a proprietary system built by an in-house IT department, or maybe it’s working with an outside tech firm to customize a solution.

The second wave is when the technology can be accessed by smaller players in the game. This is happening to financial services right now. It also is playing out in the auto industry, aerospace, manufacturing, consumer retail and many other sectors.

Tech Transitions and APPF Stock

Usually, the more traditional the sector, the slower the tech transition. There’s also the issue of regulation. The more regulated an industry, the tougher it is for tech firms to navigate the regulations and still provide profits for shareholders and services for clients.

But once the door is opened in a particular sector, a new wave of change hits fast. And fairly quickly, the winners are the small and mid-sized companies that understand the power of technology … and the tech firms that establish themselves open up wide competitive moats with their competition.

For example, in the banking industry, big banks saw the power of automating their business once the financial crisis hit. And over time, that automation helped reduced their staff, move into online banking and build a cohesive national or regional network.

Small banks and credit unions were struggling since these big chains were encroaching. But then neo-banks and financial technology firms came in and changed the landscape. Now, local and regional banks can compete effectively with large institutions and provide similar services with more local and personal flavor.

We’re seeing this transition in the real estate sector now, where Davids are now equipped to fight Goliaths. And APPF stock is leading that charge.

APPF stock is up 59% in the past year, but it’s still well off its 52-week highs. Although even at this level, it has a current price-to-earnings ratio of 116. That is high, but its growth and its potential are certainly apparent.

It fourth-quarter and year-end numbers come out on Feb. 28, which will set its short-term direction. Long term, AppFolio is a leader in a sector where its services are in great demand. And right now, APPF stock is well priced.

Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough StocksAccelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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