AppFolio (APPF)

Investment Analysis Clubs Saul’s Investing Discussions
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This is my first post to this board. Heard about it long ago but never really visited. About 3 months ago I started reading and it really is one of the best kept boards around here. I have kind of ran my own portfolio for years being fairly concentrated, with a mixture of value and growth. I have done pretty well but recently have been trying to move in the same direction as a lot of you have on this board.

I borrowed a couple of companies from you guys to invest in and would like to try and return the favor. Maybe you will like them and maybe not, but I will post them as I see something that looks like it may fit and you can kick the tires and maybe someday I will find something we all like.

I got this from Caps when I saw someone green thumb this company and it seemed interesting. I do not own any shares at this time.

AppFolio (APPF)

Market Cap 1.4 Billion
Share Price $41.35
P/E 248

Founded In 2006 in which the cofounders have around an 18% stake in the company. This is a Software as a Service company serving the property management business. This segment is about 90% of the revenues. The other 10% is from another SAAS serving small law firms.

Property Management – They post and track tenant vacancies, handle the leasing process electronically, administer maintenance and repairs, and handle accounting and reporting to property owners.

Law Firms — They provide time tracking, billing, calendaring, client communication and coordinating with other lawyers and legal documentation.

They are growing revenue around 35%. They have just recently begun to turn a profit so the high PE.

They ended the 3rd quarter with 11,250 property management customers, and 9,200 legal customers. Both of these have been growing.

At the end of the 3rd quarter they had 63.6 million in cash and no debt.

Just wondering what you guys think about the company.

Larry

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Property Management – They post and track tenant vacancies, handle the leasing process electronically, administer maintenance and repairs, and handle accounting and reporting to property owners. exactly the reasons why I have avoided owning rental real estate. So there should be demand.

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There is. With more apartment buildings being built, and condos built the percentage of people in multi-unit housing is increasing in the country. The ability to review and pay your bill on line is a big draw for both tenants and owners.

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A few more details…

The IPO must have been around the middle of 2015. They have no debt. Author/Columbia finance professor/hedge fund guy Joel Greenblatt bought about 25,000 shares some time during the 3rd quarter of this year.

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I have only kicked the tires so far. It seems like a pretty good company. I do plan on digging a little deeper and seeing what I come up with. Not sure if it is worthy of putting money to work on it just yet. I will try and come back with more info.

I do not have a subscription to hidden gems but I guess with all the different services available someone would have a recommendation on it.

Larry

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Hey Fools,

Glad to see APPF has captured the attention of Saul’s boards. This is one on my recent favorites and I jumped at the chance to cover earnings for Fool.com.

https://www.fool.com/investing/2017/11/08/appfolios-revenue-…

This company also performed extremely well on my homegrown checklist:


**Metric (score potential):                                         APPF performance** 

**Financial**
Rising/stable/falling gross margin? (+.5, 0, -.5)	                0.5
Rising/stable/falling operating margin? (+.5, 0, -.5)	                0.5
Rising/stable/falling net margin? (+.5, 0, -.5	0)                      0.5
Operating leverage ahead? Tons/modest/none/negative (+1, 0.5, 0, -1)	1
ROE above 15%/20%? (+.5, +1)                                    	0
ROE below 10? (-1)                                              	-1
Debt free? (+1)                                                   	1
Cash 2X debt / 1X debt / >1/2 debt/extreme debt? +.5, 0, -.5, -1	0.5
	
**MOAT**
Moat (+4,+3,+2,+1)                                                      3 (switching costs)
Moat getting wider/stable/narrowing? +1, 0, -1                    	1 (new features/more customers)
	
**Potential**	
Optionality: new industry / within industry / none? (+2, +1, 0)  	1
5X/10X Rev/Profit growth potential? (+.5, +1)                   	1
Top dog and first mover in important, emerging industry? (+1)	        0
Growth depends on acquisitions? (-1)	                                0 (debateable)
	
**Customers**	
Few customers >20% / >10% of sales/accounts receivable? (-2, -1)  	0
Thousands of customers? (+1)	                                        1
Amazing customer/brand loyalty? +1	                                0 (debateable)
Intense/highly competitive market? -1, -.5	                        0
	
**Company specific factors** 
Foreign HQ: -3 (Developing), -1.5 (Israel), -.5 (Developed)	        0
Outside forces necessary for success? (-2, -1, 0)                	0
Amazing/Awful business model? (+2, +1, 0, -1, -2)               	2
Actively being disrupted/at risk of long-term disruption? (-2, -1)	0
Potential/Active Government involvement? (-1)	                        0
Substantial currency risk (50% of rev outside US)? (-.5)        	0
Complicated financial statements? (-.5)	                                0
	
**Management & Culture** 	
Founder active role? (+1) 	                                        1
>5% insider ownership? (+1)                                      	1
Experience of top 3 officers: (15+ years, 5 to 15, <5? +1, 0, -1 )      1   	
Glassdoor (4+/ 3.5+/ 3+/ 2.5+/ 2.5- ? +1, 0.5, 0, -0.5, -1)	        1
Clear and compelling mission statement? (+1, 0.5, 0)                    1
	
**Stock**
Substantial market beater? (.5/+1)	                                1
Big market loser? ( -1)                                         	0
Tom E Superstock /Multiple Fool recs? (+1)	                        0
Significant buyback program? (+1/+.5)                           	0
Growing dividend? (+.5)                                         	0
Consistently beats/misses expectations? (+.5, -.5)              	0.5
Extreme dilution (-1 / -2)	                                        -2

Add it all up, and you get a 16.5. That’s an amazing score.

For perspective, the theoretical best score possible is a 28 and the worst score possible is a -25.

However, of the 250+ companies that I’ve ranked thus far, the highest score is a 19.5, the lowest is -4.5, and the average is 7.3.

APPF’s 16.5 puts it in the top 3% of all companies that I’ve ranked so far.

Brian

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Thanks for bringing this - I am also big fan of this board but mostly in listen mode and very thankful to active people on this board.

This looks like a very interesting company.
I hold Zillow for few years and have been wondering if they guys are out of tricks now to drive growth.

It seem APPF would be someone Zillow would target to acquire.

Looking at their financial on Yahoo, one this I noticed is their gross margins are in 50% or lower. For a SAAS company, this is typically in >70% and even >90% sometimes.

So I am wondering if this company only have SAAS or they also offer some services that drive up their cost?

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So I am wondering if this company only have SAAS or they also offer some services that drive up their cost?

APPF’s revenue is divided into three parts:

+Total core solutions – which is revenue earned from subscription fees that increase as its customers’ business grows. Last quarter, this comprised 39% of overall revenue.

+Total Value+ services – which is primarily earned from usage-based services like electronic payments processing, application screening, collections, advertising, website hosting, and more. Last quarter, this segment comprised 57% of revenue.

+Other revenue – which is mostly earned from customer onboarding. This was about 4% of revenue.

The company doesn’t break down a gross margin for each segment, but if I was to guess I would assume that ‘core solutions’ has very high GM, ‘Value+’ has low GM, and ‘other’ is breakeven.

Keep in mind they are rolling out new ‘Value+’ services all of the time, so they may have lower gross margins up front on new services before they scale.

The company also makes money from its legal verticle, but that is less than 10% of revenue, so its a ~$3 million/quarter business. That might not be big enough to have great gross margins yet either and could also be acting as a drag.

Overall, I’d expect gross margins to tick higher over time as operating leverage kicks in.

Also, keep in mind that APPF has already achieved profitable with the gross margin where it is today. Additional margin gains should find their way to the bottom line.

Brian

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Thanks you Brian.

Very helpful.