AppFolio Grew Free Cash Flow 30% in 2025 and Deepened Switching Costs for Customers. Is the Sell-Off Overdone?

Shares of AppFolio (NASDAQ: APPF), which makes software landlords and property managers use to run their businesses, are down 36% over the past six months as I write this, including an 18.5% decline after the company reported fourth-quarter earnings in January.

Slowing revenue growth, from 28% in 2024 to a projected 16.5% this year, has weighed on the stock. Adding to the negativity has been the fact that investor sentiment has shifted away from software-as-a-service (SaaS) stocks broadly, with the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) dropping more than 24% in early 2026 on fears that artificial intelligence (AI) tools will reduce demand for traditional software.

However, AppFolio sales grew 20% last year, and free-cash-flow (FCF) margin widened to 24.8%. After its recent slide, the stock is as cheap as it's ever been on a price-to-sales and FCF basis.

Switching costs run deep

Some of the strongest software businesses keep customers not by providing the best product on the market, but by being the hardest to replace. Microsoft is a prime example. 365 (formerly Office) is still widely used because companies have built their workflows, files, and decades of muscle memory on the software. By the time a competitor offered something better, switching meant retraining the entire workforce.

AppFolio is building a similar advantage in the commercial real estate market. A property manager running a 500-unit portfolio has years of tenant records, accounting data, and maintenance history stored in AppFolio's platform.

The company ended the year managing 9.4 million rental units across 22,000 users, up 8% and 6% from a year earlier. Full-year sales growth outpaced unit growth thanks to existing customers adding more services. Value-added services now represent 76% of total revenue, and more than one-quarter of the user base is on its premium Plus and Max plans.

Image source: Getty Images.

Now, AppFolio is pushing beyond the property manager and selling directly to the millions of tenants already in the system. Its Resident Onboarding Lift product automates enrollment into services such as renters insurance and group-rate internet at move-in. With more than 500,000 units added in 2025, that's a solid secondary source of growth.

Cash generation keeps accelerating

Free cash flow rose 30% to $236 million last year, and FCF margin expanded by 200 basis points. The stock now trades at around 24 times trailing FCF, down considerably over the past two years, and the balance sheet is clean with zero debt and $250 million in cash.

Looking ahead, management is guiding for revenue of $1.1 billion in 2026, putting its price-to-sales ratio at roughly 5.3, well below historical levels. Adjusted operating margin is expected to expand to around 26.5%, up from 24.7%. Profits are growing faster than the top line, and that operating leverage is what makes the model compelling in the long term. AppFolio doesn't need to be the fastest-growing software company to work from here.

Bryan White has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppFolio and Microsoft. The Motley Fool has a disclosure policy.