Quick Summary

AppFolio (APPF) operates cloud-based software-as-a-service (SaaS) offerings for small-to-medium-sized (SMB) property management companies. AppFolio's offering here includes managing and marketing tenant vacancies, facilitating maintenance and repairs, electronically managing the leasing process, handling accounting, and facilitating tenant/owner communication (among others). Roughly 35% of revenues come from regular subscription fees for access to the platform. 61% of sales are from value-added "tack-on" services, such as website hosting, providing landlord and renters insurance, and payment processing. Finally, a small 4% of sales are from onboarding fees.

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Does The Company Have Rising and Recurring Revenues?

YES. About 1/3rd of revenues are truly recurring subscription fees, and the rest are from value-added services that are essentially recurring. Growth has been excellent by any metric. 3-year compound annual revenue growth is over 34%, while compound annual growth in property management customers is about 13%, and units under management have grown 19% per year, indicating increased capture of customer spend. Management estimates the market opportunity in property management at $5 billion. This represents a massive addressable market versus the firm's current $305 million revenue run rate, setting up the potential for many years of continued rapid growth.

Does The Company Have Durable Competitive Advantages?

YES. AppFolio's SMB customers base their most critical business processes around the firm's platform, setting up extremely HIGH SWITCHING COSTS to migrate to a competing platform. Once on the platform, it would be highly disruptive to switch, and most customers won't do it unless there are serious advantages to doing so. While AppFolio no longer reports net revenue retention rate, it is clearly well over 100% given that its sales growth far outpaces customer growth. This indicates that not only does the company maintain their customers, but also drives increased spending from them year-over-year.

GreenDot Rating: GREEN

We think AppFolio has an extremely attractive business, providing core operational functionality to an under-served population through a highly recurrent, captive business model. Our only concern is the relatively small nature of their customer base. Small businesses have a much higher fail rate and are also subject to acquisition and integration into larger firms, both potential loss events for AppFolio. Nevertheless, this is a nice model and worthy of a GREEN (highly attractive) rating.