Have you ever heard of Appfolio, a high-flying SaaS stock no one is talking about?

Some industries will grow perpetually because they cover basic human needs, like housing. As long as the world population grows, the demand for housing will never go down, meaning that companies that operate in this industry will thrive over the long run. Just look at AppFolio ($AAPF), a real estate software name that no one is talking about.

APPF is currently trading at all-time highs on continued strong growth and improving profitability. The stock has rallied 75% this year and 1,200% over the past eight years. In other words, AppFolio is officially one of the best-performing SaaS stocks of the past decade.

Despite this stellar performance, APPF is not a widely covered stock, and even analysts themselves are not interested in covering it. For some reason, no analysts participate in the quarterly earnings calls as are no Q&As after the prepared remarks. However, AppFolio is a high-growth company with bright prospects and can continue to outperform whether analysts cover it or not. Here's why.

Leader In A Large And Growing Market

AppFolio is a SaaS company that offers a modern cloud-based platform for real estate investors, developers, and managers. Its flagship product is the AppFolio Property Manager (APM), which is an all-in-one cloud-based software that helps real estate professionals streamline their operations. APM offers a comprehensive suite of features, including tenant screening, online rent collection, maintenance tracking, financial reporting, and automated communications. This platform empowers property managers to efficiently manage rental properties, reducing administrative burdens and improving overall operational efficiency.

AppFolio modernizes and digitizes the real estate management industry, and with over 7.5 million units on its platform, it's the leader in the space. As you can see below, AppFolio is seeing the highest search volume among competitors based on Google Trends, highlighting its very high brand awareness.

AppFolio continuously improves its product, adding new features to make it more competitive as well as to increase the upselling and cross-selling potential. For example, last year it launched AppFolio Stack, which is a marketplace for real estate apps allowing customers to customize their key workflows to match how their business operates. Stack is available for Plus subscribers who pay $3 per unit per month instead of $1.40 per unit per month for Core subscribers. The expensive Plus subscription actually accounts for 71% of total revenue as AppFolio primarily targets large real estate management companies with thousands of units that need advanced features like affordable housing management, rent control compliance, advanced reporting and others. These advanced features are available only to Plus subscribers.

The company has also started to utilize AI to improve its product functionalities. It has recently launched AppFolio Realm, a full suite of AI capabilities including smart maintenance, automated bank feeds, and an AI leasing assistant, Lisa, which is designed to optimize the leasing process by matching tenants with available units.

The aggressive product development strategy and large addressable market can help APPF grow rapidly for years to come. There are currently more than 142 million residential units in the US, meaning that AppFolio has a market share of only 5.3%. And the company hasn't started to explore the possibility of international expansion yet due to the large greenfield opportunity in the US.

Continued Rapid Growth And Improved Operating Efficiency

AppFolio is one of the few SaaS names that hasn’t seen a sharp slowdown in growth in the current high-interest rate environment. As you can see below, its growth rate trend is very healthy and slows down gradually as the company matures, which is perfectly normal and highlights a successful growth strategy.

AppFolio's growth has been resilient to the macro disruptions because of the nature of the real estate industry. It hasn’t seen increased churn like other software names because rentals provide stability, which is why AppFolio's growth rates are relatively stable as well.

In Q1, revenue grew 29% y/y to $136 million and easily beat estimates by over $5 million, driven by a 35% increase in revenue from Plus subscriptions and a 21% increase in Core subscriptions. The company also raised its full-year growth outlook during the quarter, underscoring the resilient growth momentum amid a challenging macro.

AppFolio is not yet profitable on a non-adjusted basis but it's cash flow is positive and operating margins are improving as the company is scaling nicely. Its Q1 operating expenses, excluding a one-time CEO separation expense, increased 26% y/y, trailing the revenue growth of 29% over the same period. And if we exclude stock-based expenses, the Q1 adjusted operating margin improved to -1.6% from -5.3% a year ago, which shows that the company achieves operating leverage. APPF also generated $1.6 million in cash from operations (OCF) during the quarter, up from a negative OCF of $2.2 million a year ago.

What About Valuation

APPF is currently priced at a PS multiple of 13, which is the highest multiple since November 2021. The stock has soared lately because of the continued strong financial performance, meaning that the premium valuation is actually justified. A PS multiple in the low to mid-teens is very common for high-quality SaaS stocks like APPF but investor expectations are now very high and the company needs to continue to overdeliver in the quarters ahead; otherwise, the stock will be rerated to the downside.

What Else

AppFolio is a very interesting growth story in the SaaS space but for some reason, the stock is still flying under the radar despite the stellar returns. The future prospects look bright as there's a massive and resilient addressable market, and APPF is currently the leader in its space. You could consider opening a position in this name on a pullback.

I've no positions in the stocks mentioned.

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