AppDynamics' (Pending:APPD) upcoming IPO has attracted much attention as it's the first unicorn to go public in 2017. After a slow 2016 for the IPO market, investors are hopeful that 2017 will be a stronger year and are looking towards the performance of AppDynamics as a signal to whether other large tech startups will join the IPO pipeline.

AppDynamics is expected to go public on Thursday (1.26.17) and raise $132M through the sale of its 12M shares. Assuming it prices at the mid-point of its price range, the company would have a market cap value of $1.5B. This valuation is less than the $1.9B which AppDynamics was estimated to be valued, at its most recent round of financing on 12.1.2015. This decrease in valuation could be seen as a worrisome sign and is not great news for the company's VC investors, who supported the company as a private company.

To date, AppDynamics had raised 314.5M in six rounds of financing. In its most recent round, the company raised $158M. Notable investors include Altimeter Capital, Battery Ventures, General Atlantic, Greylock Partners, Institutional Venture Partners, Kleiner Perkins Caufield & Byers, Lightspeed Venture Partners and Sands Capital Ventures, among others.

The company's underwriters include JPMorgan (NYSE:JPM), BofA Merrill Lynch and Deutsche Bank (NYSE:DB).

Business Overview

AppDynamics was founded in 2008 by its now Chief Technology Officer Bhaskar Sunkara and Chairman Jyoti Bansal. The company develops application performance management (APM) solutions for businesses. These solutions enable businesses to monitor, analyze and improve their digital business performance in real time as well as spot and fix bugs before they became issues. Its products include application performance management, end-user monitoring and infrastructure visibility. Prior to its IPO, AppDynamics had ~1,975 customers using its platform, including Tesco, UBS (NYSE:UBS) and Nasdaq (Nasdaq:NDAQ), among others.

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Executive Management Highlights

David Wadhwani has served as President, CEO and director of AppDynamics since September 2015. Prior to joining AppDynamics, Wadhwani served in various executive roles at Adobe (ADBE) (Dec. 2005 - Sept. 2015) and Macromedia Inc., which was acquired by Adobe in 2005. He had previously co-founded iHarvest Inc., a web content management company. He holds a B.S. in Computer Science from Brown University.

Randy S. Gottfried has served as Chief Financial Officer since January 2015. Prior to joining AppDynamics, Gottfried was a private investor (June 2013 to December 2014), and Chief Financial Officer of Riverbed Technology, Inc. (February 2004 to May 2013), a network technology company acquired by Thoma Bravo, LLC in April 2015. Gottfried holds a B.B.A. degree in Accounting from the University of Michigan and an M.B.A. degree from the Kellogg Graduate School of Management at Northwestern University.

Financial Performance

AppDynamics has grown revenue rapidly. For the years ended January 31, 2014, 2015 and 2016, the company recorded revenue of $23.6 million, $81.9 million and $150.6 million, respectively, representing YOY growth of 247% and 84%. For the nine months ended October 31, 2015 and 2016, revenues were $102.8 million and $158.4 million, respectively, representing YOY growth of 54%. Additionally, gross margin climbed to a high 74% in the most recent full year. AppDynamics incurred net losses of $68.3 million, $94.2 million and $134.1 million in the fiscal years ended January 31, 2014, 2015 and 2016, respectively. Increasing net losses are the result of increased operating expenses on development of new applications as well as sales and marketing effort. In 2016, the company spent $238.6M on total operating expenses.

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As of October 31, 2016, the company had $237.4 million in total liabilities, $35.3 million in marketable securities and $94.5 million in cash-on-hand.

Competition

Competition is fierce in the application performance management space. Top competitors include Red Hat Inc. (NYSE:RHT) and New Relic (NYSE:NEWR). New Relic went IPO in December 2014 and competes closely with AppDynamics. Additionally, both companies were founded by former management of Wily Technology. One key difference is the fact that AppDynamics customers include many large enterprises whereas New Relic has mainly targeted SMBs. Assuming AppDynamics is valued at a market cap of $1.5B, it would trade at a price/sales multiple of 9.96x. This is slightly above that of New Relic and significantly below that of the industry average for internet software services.

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Conclusion: Consider An Allocation

As the first unicorn to go public in 2017, AppDynamics is raising a lot of attention. However, not all of the publicity has been positive, with some raising concern here and here. The fact that its expected valuation is less than its valuation at its last round of financing has some investors worried.

Overall, the company is growing revenue at an impressive rate, has high gross margins and competes in a rapidly growing market.

Our team expects further growth in the near future and at its current valuation see an opportunity. We recommend investors consider an IPO allocation.

We hear the deal is oversubscribed and could price at the high end of the range.