Down 84%, Is This Artificial Intelligence (AI) Stock a Buy After an Earnings Pop?

Like much of the software sector, cloud computing specialist Appian (NASDAQ: APPN) saw its shares fall sharply in the bear market of 2022.

The stock had soared to a sky-high valuation in early 2021 with the help of a short squeeze, but that proved to be unsustainable. And though the company delivered solid growth through the broader slowdown in the tech sector, the valuation has compressed substantially. Shares are now down 84% from their peak in early 2021.

However, Appian’s shares jumped over 12% this past Thursday on its fourth-quarter earnings report. The company delivered solid results on the top and bottom lines, and talked up its new initiatives in artificial intelligence (AI) and “data fabric,” a technology that connects disparate sources of data to make them accessible and easy to use.

So is Appian a good buy for investors now? Let’s dive deeper and see.

A look at the latest results

The company reported cloud revenue growth of 26% to $83.1 million in the fourth quarter, driving overall revenue up 16% to $145.3 million, which beat estimates of $140.9 million. It also reported a surprise adjusted profit per share of $0.06, much better than the consensus estimate of a $0.24 loss, and its actual loss of $0.28 in the same quarter a year ago.

Appian actually cut operating costs as it grew the business, and expects to cross break-even for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024 after turning in an EBITDA profit of $1 million in the fourth quarter.

Following the stock’s double-digit jump, investors seem excited about the solid revenue growth, narrowing losses, and increasing exposure to AI.

What Appian is doing with AI

What may be encouraging some investors is Appian’s focus on a technology called low-code data, which is a simple way to connect to data from different sources.  Unlike other forms of data management, Appian’s data fabric doesn’t house its customers’ data, allowing customers to have better control over it. Instead, the data fabric acts as a “virtual database,” as CEO Matt Calkins described it.

Calkins said that data fabric has been Appian’s No. 1 feature for a couple of years now, and it now shares that position with its AI feature. Calkins added of data fabric: “It’s one of the best features we’ve ever written, and I think customers understand that, and they’re using it as if they know that.”

Data fabric is a key part of the company’s AI strategy, which focuses on what Calkins calls “private AI.” That allows customers to own their data, and Appian to sell them the tools they need to access it and best understand it — including data fabric.

On the company’s recent earnings call, Calkins explained that these new features would be revenue drivers for the company: “So we are absolutely expecting that these features will drive a revenue differentiation. Not just volume, not just retention, not just a competitive advantage, but also tagging them with revenue.”

An IT team in a data center.

Image source: Getty Images.

Is Appian stock a buy?

Appian’s improvement on the bottom line in the quarter was impressive. The company posted an adjusted profit, and both its cost of revenue and operating expenses fell year over year, showing an improvement in cost controls even as growth remained strong.

Additionally, the fourth quarter had the fastest net retention rate growth in several quarters at 119%, meaning that existing customers increased their spending with Appian by 19% year over year, faster than they previously had.

Appian’s full-year guidance calls for cloud revenue growth of 20% and total revenue growth of 13%. It also expects an adjusted EBITDA loss of $23 million to $25 million, but management sees EBITDA turning positive by 2025.

The company is set to hold an Investor Day conference in April, which will include updates on AI and data fabric — as well as a surprise, according to Calkins. That conference could provide another leg up for the stock. Investors are clearly eager to get exposure to artificial intelligence.

If Appian can leverage its AI products into meaningful revenue growth, the upside potential for the stock looks significant.

Should you invest $1,000 in Appian right now?

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Appian. The Motley Fool has a disclosure policy.

Down 84%, Is This Artificial Intelligence (AI) Stock a Buy After an Earnings Pop? was originally published by The Motley Fool

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