This Small-Cap Stock Just Crushed Earnings. Is It a Buy?

Like much of the software-as-a-service (SaaS) sector, Appian (NASDAQ: APPN) has had a rough year. Shares of the business process automation company are down 33% year-to-date, falling in line with the rest of the software sector.

The market seems to believe it's vulnerable to competition from AI platforms like Anthropic as the stock fell sharply in late January on a broader sell-off over AI fears, and again in April after Anthropic announced its Mythos AI model, which it said was too powerful to release to the public.

Despite those concerns, Appian hasn't exhibited any weakness in its business. In fact, the company, which is leveraging AI as part of its cloud subscription platform, just reported one of its best quarters in years.

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Appian's Q1

Appian's total revenue rose 21% to $202.2 million, well ahead of the consensus at $191.8 million. Cloud subscription revenue was up 25% to $124.5 million.

The company's earlier cost-cutting and improved go-to-market efficiency also continued to pay off as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $16.8 million to $26.6 million. It also reported a generally accepted accounting principles (GAAP) operating profit of $3.2 million. Adjusted earnings per share more than doubled from $0.13 to $0.27, easily beating the consensus at $0.18.

Appian AI is taking off and accelerating the business's growth, as nearly 40% of its customers have purchased AI-inclusive license tiers. Appian is landing and expanding deals with Fortune 500 companies and government agencies that need error-free AI for mission-critical applications.

CEO Matt Calkins also noted that, despite the popularity of vibe-coding, using AI alone to create mission-critical applications is not a viable strategy, as those applications need to be updated and supported through tools such as those that Appian provides.

Appian's solid first-quarter results led it to raise its full-year guidance, calling for revenue of $819 million-$831 million, up 13%-14%, and better than its earlier forecast of $801 million-$817 million. Given the first-quarter growth rate, that forecast is likely conservative.

On the bottom line, it now expects adjusted earnings per share of $0.94-$1.05, up from an earlier forecast of $0.82-$0.96. At the updated guidance, Appian now expects EPS to increase by roughly 60%, showing how far the business has come. Based on that guidance, the stock now trades at a forward P/E of just 23.

Can Appian break through the software malaise?

The biggest challenge for Appian as a stock may be overcoming the negative investor sentiment toward the software sector. As a small-cap stock, it may be particularly hard for the company to change investors' minds on its own.

In an interview with the Motley Fool, CEO Matt Calkins discussed this issue, saying that there's a lot of emotion in the market, adding, "Perception comes with time, and right now, there's a lot of emotion, but not a lot of perception."

Indeed, the pressure from AI start-ups is new, but at this point, Appian's valuation seems like it has compressed enough that that risk is baked in. The company also increased its share repurchase authorization from $50 million to $100 million and plans to execute that buyback this year, which could lower shares outstanding by 5%.

Before the earnings report, Morgan Stanley downgraded the stock to equal weight, noting that the environment for seat-based software models is challenged, and said Appian would need to deliver a sustained period of sales acceleration to overcome that headwind.

That seems to summarize the challenge facing both Appian and its software peers, but it may turn out to be more sentiment-driven, as CEO Calkins alluded to. If Appian can keep up its recent momentum and deliver more quarters like this one, the stock should eventually respond.

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