Did Appian Just Prove It's an AI Winner?

Enterprise software stocks have slumped this year due to fears of AI disruption. AI-native applications from start-ups like Anthropic are now a threat to entrenched cloud software, and could displace them entirely, the thinking goes.

As a result, the iShares Expanded Tech-Software ETF, which tracks major software stocks, is down 7.4% for the year, compared to a 12.7% gain for the S&P 500.

One of the software stocks that has gotten hit by that sell-off is Appian (NASDAQ: APPN), a maker of workflow automation software, which is down 16.9% for the year. Appian's decline comes as the company is delivering strong results even with the uncertainty from AI.

Those trends were on display again in the company's second-quarter earnings report, as it beat estimates on the top and bottom lines, and raised its full-year guidance. Despite that, Appian was trading lower on Thursday, down more than double digits at one point before clawing back most of those losses.

Let's take a look at Appian's latest quarter and see why investors may be misunderstanding the stock.

Image source: Getty Images.

Appian separates from the competition

Cloud revenue, the company's focus, rose 23% to $131.7 million, driving overall revenue up 19% to $203.3 million, well ahead of the consensus of $193.4 million.

Despite broader worries about slowing growth in the sector, Appian showed it continues to thrive in the AI era, with its top-line growth accelerating.

Appian also continued to expand its margins with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) doubling from $8.1 million to $16.2 million. Adjusted earnings per share, meanwhile, improved from break-even to $0.13, which easily beat estimates at breakeven.

CEO Matt Calkins, who spoke to The Motley Fool, noted that the company had its tenth straight quarter of improving go-to-market productivity, showing that its sales-and-marketing spending continues to drive greater return. The company has also been able to do that while expanding headcount over the last year, showing it's expanding margins while investing in growth.

Appian's performance was especially notable for the contrast it portrayed with other SaaS companies, including Pegasystems, its chief rival. While Pega reported delays in signing deals, a sign that customers are growing cautious as they consider AI options, Appian is seeing its deal cycle accelerate, and its win rates have gone up as well. Calkins considers AI to be a tailwind for the company, saying, "We don't sell with AI. We sell as AI," and he added that if AI is involved in a deal, it means "a faster sale, more likely to win, bigger expected growth."

Calkins sees Appian's strength as eliminating the risk in deploying AI by adding a deterministic layer, guardrails, governance rules, and other protocols to ensure that it can be used for mission-critical work. That's why so many banks, insurers, and pharmaceutical companies work with Appian, and why it counts the federal government as its biggest customer.

Is Appian a buy?

In addition to beating estimates on the top and bottom lines, Appian also raised its guidance for the full year. It now sees revenue of $845 million-$853 million, up from a previous range of $819 million-$831 million, and it called for adjusted EPS of $1.04-$1.12 versus the earlier forecast of $0.94-$1.05.

A report like this would typically lift a stock, but that didn't happen as the malaise in the broader software sector seemed to counteract it. Additionally, investors may be skeptical of Appian's turnaround, as the company has only recently become profitable.

However, its AI strategy appears to be paying off and looks poised to be a winner, while peers like Pegasystems struggle to stay relevant.

It may take a few more quarters like this for the stock to start to move higher, but there's a lot of upside potential if it can deliver 20% growth and rapidly expanding margins.

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