APPF - AppFolio: High-Quality Compounder With Abnormally High Business Returns

2024-07-10 11:53:30 ET

Summary

• AppFolio continues to unlock substantial value from its differentiated offering in property management.
• Management are rotating ~1x gross profit for every $1 assets employed, creating immense economic leverage for future earnings growth.
• Fading returns on capital and current multiples lower on 3-year forward estimates imply $280/share valuation today with 26% CAGR to FY'26E.

Investment update

AppFolio, Inc. (APPF) common stock is +50% since my last publication in January. That note, titled " Exposure To Real Estate Without Capital-Hungry Growth", provided a top-down analysis of my reasoning for adding the business to our equity risk budget, namely:

1. The capital-hungry nature of the real estate business in general, with particularly high CapEx requirements to maintain competitiveness and regulatory standards [not to mention, all of this CapEx spend is in 'replacement' dollars, i.e. today's inflated dollars],
2. The propensity of intangible-heavy balance sheets to offset these headwinds in the current climate,
3. The fact software providers—as in APPF's case—should be viewed as capital providers. In that vein, they sit at the top of the capital structure, as their compensation is tied to OpEx, versus a capital charge.

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