Appian’s 16.3% return over the past six months has outpaced the S&P 500 by 5%, and its stock price has climbed to $35.42 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Appian, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Is Appian Not Exciting?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why APPN doesn't excite us and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within software, a stretched historical view may miss new innovations or demand cycles. Appian’s recent performance shows its demand has slowed as its annualized revenue growth of 14.6% over the last two years was below its five-year trend.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Appian’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

3. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Appian’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 10.5% for the last 12 months will decrease to 8.5%.

Final Judgment

Appian isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 3.5× forward price-to-sales (or $35.42 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

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